Definition of negative equity

A borrower is said to be in negative equity when the outstanding value of an asset is less than the loan taken out to buy it. The term negative equity is frequently used to describe the housing market when a downturn in the market can result in the value of a mortgage being more than the new depressed value of the property. In the US, borrowers in negative equity are often referred to as being "underwater".

 

negative equity in the news

After the 2007 US subprime mortgage crisis (that precipitated the global financial crisis of 2008-2009) many home borrowers were plunged into negative equity. Banks and other mortgage lenders had been taking advantage of cheap money and lending to people who were very unlikely to be able to repay the loan. When the housing bubble burst many borrowers found themselves in negative equity. As the financial crisis took hold and banks became reluctant to lend, housing prices in many developed countries fell and the problem of negative equity spread.

In February 2013 it was reported that four in 10 of the buyers who ventured into the UK housing market after the start of 2007 and subsequently resold their properties did so at a loss.

Meanwhile, in January 2013 US house prices remained 29 per cent below their 2006 peak and 10.9m US homeowners, representing 26 per cent of all homes with an outstanding mortgage, were seriously underwater (or in negative equity) according to a housing data provider contacted by the FT in February 2013.




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