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Published: September 16 2011

Seventy five percent of all homeowners who owe more on their homes than they are worth are paying mortgage interest rates nearly a point higher than today's average rate for a thirty year fixed mortgage.

Eight million of the more than 28 million outstanding mortgages that have above market rates and that in theory could be refinanced have interest rates higher than 5.1 percent, according to the latest CoreLogic data through the end of the second quarter. Freddie Mac's current average rate on a thirty year fixed mortgage is 4.12 percent.

The disparity between what homeowners in trouble are paying and today's average rates is even greater for those with severe negative equity. More than 40 percent of borrowers with 125 percent or higher loan-to-value (LTV) ratios have mortgages with rates at 6 percent or above, compared to only 17 percent for borrowers with positive equity.

Millions of underwater homeowners have not taken advantage of the Home Affordable Refinancing Program (HARP) launched in 2009 to help homeowners refinance to take advantage of lower rates. After more than two years, fewer than one million homeowners have taken advantage of the program, which is limited to those with mortgages owned by Fannie Mae or Freddie Mac and whose first lien mortgage does not exceed 125 percent of the current market value of the property. Borrowers must also pay closing costs.

Last week President Obama announced a new refinancing initiative as part of his jobs agenda that "would put more than $2,000 a year in a family's pocket, and give a lift to an economy still burdened by the drop in housing prices."

Subsequently, the head of the Federal Housing Finance Agency said that "FHFA staff has been analyzing these issues and discussing with a range of stakeholders various 'frictions' in HARP and what may be done to ease those frictions. The final outcome of this review remains uncertain but FHFA believes this undertaking is worthwhile and consistent with our conservator responsibilities."

CoreLogic also found that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011, down very slightly from 22.7 percent in the first quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages account for 27.5 percent of all residential properties with a mortgage nationwide.

Nevada had the highest negative equity percentage with 60 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (45 percent), Michigan (36 percent) and California (30 percent)

The negative equity share in the hardest hit states has improved. Over the past year, the average negative equity share for the top five states has declined from 41 percent to 38 percent. Nevada had the largest decline over the last year, with the negative equity share dropping from 68 percent to 60 percent. The reason for the Nevada decline is the high number of foreclosures that led to lower numbers of remaining negative equity borrowers.

Negative equity not only restricts refinancing, but also sales. Since the 2005 sales peak, non-distressed sales in zip codes with low negative equity have fallen 61 percent, compared to an 83 percent sales decline in high negative equity zip codes. The typical seasonal changes in sales volume in high negative equity zip codes is very muted, which indicates that non-distressed sales are being heavily impacted by the high levels of negative equity in their neighborhood, even if sellers have equity.

The federal homebuyer tax credit that expired last year contributed to a spike in high loan-to-value (LTV) loans. As the housing market collapsed, underwriting began to tighten in 2008 and the share of high LTV loans (90 percent to 100 percent LTV) began to decline. However, the federal homebuyer tax credit helped propel home sales in 2009 and 2010 and led to minor spikes in high LTV FHA lending centered near the expiration of the tax credit initially in November 2009, which was then then extended to April 2010. In the span of six months in 2009, the high LTV share increased from 13 percent to 18 percent, which is large given such a small time period.

"High negative equity is holding back refinancing and sales activity and is a major impediment to the housing market recovery. The hardest hit markets have improved over the last year, primarily as a result of foreclosures. But nationally, the level of mortgage debt remains high relative to home prices," said Mark Fleming, chief economist with CoreLogic.