More than 14m borrowers were underwater as of Q110, owing more on a mortgage than the value of the underlying property.
But with a further 10.8% decline in house prices expected relative to Q409 levels, another 6m borrowers are likely fall into negative equity by the end of 2011, according to commentary today by Deutsche Bank.
It makes for 20m underwater borrowers total before 2012.
The presence of negative equity goes hand-in-hand with an increased likelihood of strategic default, as borrowers sometimes may not be willing to pay when the house has lost substantial amounts of value.
The firm noted that, even when strategic default makes economic sense, many borrowers resist on moral and social grounds, as well as from fear of legal consequences. The existence of recourse — when a lender is able to pursue a borrower’s other assets — also acts as a disincentive against strategic default.
“Walk away or strategic default from a house with negative equity makes economic sense, especially in locations that have less expensive rentals,” Deutsche Bank researchers said.
“Many existing academic studies model homeowners’ default decision based on the theoretical hypothesis that a borrower would exercise a default when it is in-the-money, i.e., when the borrower’s house has negative equity. Therefore, a homeowner with negative equity would default even though they can still afford to make their mortgage payments.