The percentage of U.S. homeowners that owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March as home prices continue to fall, Deutsche Bank said on Wednesday.
Home price declines will have their biggest impact on conforming loans that meet underwriting guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Conforming loans make up the bulk of mortgages, and are typically less risky because of stringent requirements.
Of conforming loans, 41 percent will be underwater by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said.
For many, the home has morphed from piggy bank to albatross, Deutsche analysts Karen Weaver and Ying Shen said in the report.
Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization of the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month. A widely-watched index revealed home prices in May rose for the first time since 2006.
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity, and provides an incentive for borrowers to walk away from their mortgages.
Homeowners with the riskiest mortgages handed out during the housing boom have seen the greatest erosion in equity. They include subprime loans, of which 69 percent will be underwater in 2011 from half of them in March, Deutsche said,
Of option adjustable-rate mortgages -- which could reduce payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.
(Reporting by Al Yoon; Editing by Chizu Nomiyama)