Some traditionally stable housing markets are facing new stress as rising numbers of affluent homeowners find that they have little to no equity in their homes.

Last week we looked at the accelerating deterioration of jumbo mortgages, which are too large for government backing. Wednesday’s WSJ looks at a new Zillow study that says 20% of homeowners are underwater, with mortgages worth more than the value of their homes.

Jumbo borrowers were once seen as less likely to default, because they were required to put down substantial down payments—ranging from 10% to 20% or more—even during the boom when lax lending ruled. But as home prices have fallen sharply, more markets that have lots of jumbo loans are seeing an outsized share of borrowers with negative equity.

In the San Jose-Santa Clara, Calif., area, almost two-thirds of all outstanding mortgages are jumbo, according to Zillow. In that market, nearly one in five homeowners are underwater and that figure rises to around 45% when looking at mortgages obtained within the last five years.

One big worry: Negative equity situations could spur more foreclosures and short sales, particularly as more affluent homeowners lose their jobs or take new ones that pay less. Short sales accounted for around 12% of all home sales in both of those California markets last year.

Jumbo borrowers face added challenges because it’s hard to refinance without putting more money into their homes, and it’s hard to find jumbo mortgages with low rates that don’t require hefty fees. The Obama administration’s housing rescue plans haven’t dealt much with jumbo borrowers, largely focusing on helping homeowners below the conforming loan limits, which are set at $417,000 in most of the country and rise to as high as $729,750 in the most expensive housing markets.

Brian Ripp, CRS, GRI, Broker - your  Bay Area Realtor

www.BrianRipp.com   serving Fremont, Newark, Union City & surrounding communities. Real Estate & Property Management.