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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 62 October 2024 J O U R N A L Over the previous three quarters, eq- uity had appeared to be stagnating, but rising prices along with low inventory and strong demand had increased eq- uity-rich levels. Other economic factors included the nation's unemployment rate dropping below 4%, relatively stable house mortgage rates that fluctuated about 7% for a 30-year fixed loan, and record highs in the financial markets. When examined annually, equi- ty-rich levels increased in an estimated 31 states. From a quarterly standpoint, lower-priced markets, primarily in the Midwest and South, saw the largest rises. In Kentucky, from 28.7% in Q1 of 2024 to 37.4% in Q2 of 2024, the percentage of mortgaged properties deemed equi- ty-rich grew. In Illinois, the percentage of residences with high equity increased from 28.3% to 36.1%. Oklahoma had an increase from 28.1 to 34.5%, Alabama from 35.7 to 41.9%, and Missouri from 38.3 to 45.5%. Although equity-rich levels have increased significantly in the South and Midwest, these same regions also have large percentages of dangerously under- water mortgage levels. Southern States, Severe Underwater Mortgage Levels, and Worsening Factors Loan sums for seriously underwa- ter mortgages exceed the estimated market value of the property by at least 25%. While the number of underwater mortgages is declining nationally, many states—especially those in the Midwest and South—continue to face difficulties. According to Realtor.com's Fred Goncher of Backyard Mortgage Corp. in Garnerv- ille, New York, the issue of underwater mortgage levels is closely linked to job rates. According to Goncher, the rate of substantially underwater mortgage levels is often higher in southern areas. The causes are frequently a confluence of demographic shifts and economic factors like employment rates. "Declining population leads to declining real estate prices," Goncher said. "Declining real estate prices leads to underwater mortgages." Oklahoma, Kentucky, and Louisiana are states that produce energy from fossil fuels. Because of U.S. policy, the output of fossil fuels has decreased, which has decreased jobs and economic activity in several states. If consumers can't afford to buy a home, house prices decline, and more homeowners default on their mort- gages. Another driving factor contribut- ing to the rise in underwater mortgages is population reduction. Now that economic trends and the recent reduction in interest rates are pushing homeowner equity higher, homeowners in states with high percent- ages of underwater mortgages should begin to enjoy some reprieve. In Q2 2024, the percentage of substantially underwa- ter mortgaged properties fell to one in 42 nationwide. In Q1 2024, that percentage was one in 37, and in Q2 2023, it was one in 36. In 37 states per year and 47 states on a quarterly basis, the rate declined. The top 10 states with underwater mortgages by count as of Q2 2024: 1. Texas (number of seriously un- derwater mortgages: 109,254) 2. Illinois (102,825) 3. Ohio (91,125) 4. Pennsylvania (88,811) 5. California (85,412) 6. Louisiana (67,840) 7. Florida (61,830) 8. Georgia (49,149) 9. Michigan (47,045) 10. Missouri (46,556) The top 10 states with underwater mortgages by percentage as of Q2 2024: 1. Louisiana (10.5%) 2. Mississippi (6.8%) 3. Kentucky (6.3%) 4. Arkansas (5.4%) 5. Iowa (5.2%) 6. North Dakota (5.0%) 7. Oklahoma (5.0%) 8. West Virginia (4.7%) 9. Illinois (4.0%) 10. Missouri (3.9%) From the first to the second quarter of 2024, the percentage of substantially submerged properties increased in only two states, and even then, it increased very little. South Dakota increased from 3% to 3.1%, and Utah increased from 2.1% to 2.2%. Conversely, the states with the lowest percentages of mortgages that are substantially underwater were Califor- nia (1.2%), Rhode Island (0.9%), New Hampshire (1%), Massachusetts (1.1%), and Vermont (0.7%) all having mortgages that are seriously underwater. How Do Underwater Mortgages Look in Q4 2024? In Q2 2024, homeowner equity in- creases outpaced gains over the previous five years, and underwater mortgages have also benefitted from it. However, what is ahead? Will these patterns hold up? The CEO of ATTOM, Rob Barber, predicts that increased buyer demand over the summer will have driven prices further higher. For mortgages that are underwater, this is good news. This, along with the recent decline in interest rates, should cause demand for homes to increase even more, raising property values in the process and lowering the number of underwater mortgages, espe- cially in states in the Midwest and South. COMMERCIAL CHAPTER 11 BANKRUPTCY FILINGS JUMP YOY A ccording to data provided by Epiq AACER, the 6,067 total Commercial Chapter 11 bankruptcies filed during the first nine months of 2024 represented a 36% increase over the 4,561 filed during the same period in 2023. "As we close out the third quarter in 2024, we continue to see a steady increase in both individual and com- mercial filings this year to date. The recent Fed rate cut (and signal for further cuts) spurred by slowing job gains and an increase in the unemployment rate leads me to believe the steady increase in those seeking bankruptcy protection will continue through 2024 and into 2025,"