Economy Watch: More Residential Borrowers Underwater in 4Q

Twenty-three percent of U.S. residential mortgages are underwater; AARP has filed suit against HUD for its handling of reverse mortgages; and there are more Subways in the world than McDonald's.

By Dees Stribling, Contributing Editor

CoreLogic reported on Tuesday that fully 11.1 million, or 23.1 percent, of all U.S. residential properties with a mortgage were “in negative equity”–underwater, that is–at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The increase reflects price declines that occurred during 4Q10, according to the company.

Nevada had the highest negative equity percentage, with 65 percent of all its mortgaged properties underwater, followed by Arizona (51 percent), Florida (47 percent), Michigan (36 percent) and California (32 percent). The average loan-to-value ratio for a mortgaged property in Nevada is 118 percent.

Should average home prices nationwide drop by 5 percent to 10 percent in 2011, CoreLogic posits, negative equity will rise another 10 percentage points, all else being equal. Given price declines, the states with the largest risk of seeing more properties go underwater this year are Alabama, Idaho and Oregon. That’s because these states have a high share of loans that are already near negative equity, combined with rapid home price depreciation.

AARP takes HUD to court

AARP Foundation Litigation, a branch of the senior advocacy organization, has filed suit against HUD over its regulatory handling of reverse mortgages, representing three surviving spouses of deceased reverse-mortgage holders. The lawsuit, filed in U.S. District Court for the District of Columbia, alleges that the agency abandoned long-established federal rules and violated protections for surviving spouses, with the result that the three plaintiffs, who are from Indiana, New York and Maryland, are now facing foreclosure and eviction from their homes.

In a reverse mortgage, borrowers receive money in exchange for their home equity, and the loan typically isn’t due until the last homeowner dies, moves permanently or sells the home. According to the AARP, HUD’s own rules said that no borrower or his heirs can be liable for more than the value of the property. That’s especially important now, considering how many homeowners are underwater.

“Then, in December 2008, HUD abandoned that interpretation and stated for the first time that spouses or heirs who wanted to retain the home were required to repay the full balance, even if it exceeded the property’s current value,” the organization said in a statement on Tuesday. “Strangely, HUD’s current rule is that a stranger can purchase the property for its current appraised value, but a surviving spouse cannot.”

Subway bests McDonald’s

Since time immemorial in the fast-food business, which would be since sometime in the 1970s, McDonald’s has been king of the hill in terms of number of restaurants, sales and everything else. No one else could compare.

Now Subway has taken the lead from McDonald’s, at least in the number of restaurants that bear the name worldwide (but not sales; not yet). Compared to McDonald’s, which was founded in the 1950s, Subway is practically an upstart, making its first sub in 1965, but there’s no denying Subway’s itch to grow. At year-end 2010, the chain had 33,749 restaurants worldwide, compared to McDonald’s total of 32,737.

East Asia is expected to be the engine of further growth for Subway, with the chain now counting about 1,000 restaurants in that part of the world, including locations in China, Japan, South Korea and its first in Vietnam, which opened not long ago. Subway is also known for pursuing unusual locations, such as military bases (and three in the Pentagon itself), a zoo, a riverboat and an auto showroom, among many others.

Wall Street bounced upward like a rubber ball on Tuesday, with the Dow Jones Industrial Average gaining 124.35 points, or 1.03 percent. The S&P 500 was up 0.89 percent, and the Nasdaq advanced 0.73 percent.

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