The Washington PostDemocracy Dies in Darkness

More homeowners no longer need to be in foreclosure, and they may not even know it

They'll rent it back to you. (Rick Wilking/Reuters)

An increasingly larger share of homes in the foreclosure process have positive equity.

This baffling tidbit from RealtyTrac turns on its head the most common reason behind foreclosures in recent years.  When the housing market soured and home prices plunged, many people ended up “underwater” – meaning they owed more on their mortgages than their homes were worth and therefore could not refinance or sell their properties if they faced financial difficulties.

But what’s with the homes that are not underwater yet still in foreclosure?  The share of foreclosures with positive equity in the first quarter reached 35 percent, up from 31 percent in the previous quarter and 24 percent in the third quarter of 2013, according to RealtyTrac, a mortgage research firm. These involve borrowers who have defaulted on their loans or are in some other stage of the foreclosure process but their homes have not been taken over by the banks.

The metro markets with the most positive equity foreclosures are: Denver (64 percent), Boston (58 percent), Minneapolis (58 percent), Houston (54 percent) and Washington, D.C. (52 percent.)

The reason behind the phenomenon may have everything to do with timing.  Once a foreclosure is initiated, it can take a year or even multiple years to complete the process, depending on the state.  A lot can happen to prices in that time. Consider that home values have seen spectacular gains in the past two years.

“It could be that when they first entered into foreclosure they may not have had equity in the home,” said Daren Blomquist, vice president at RealtyTrac. “But in the past year, as home prices have risen dramatically, some have regained their equity even though they're still in the foreclosure process.  We're hearing from real estate agents that this is what’s happened to a lot of these people.”

Some folks may not even know it, in part because they’ve moved out and aren't keeping tabs on the home or its value anymore.  A high percentage of all homes in foreclosure are vacant, but RealtyTrac has not cross-referenced to see how many of the vacant ones have positive equity.

Paying attention to home values can make all the difference.  In some cases, borrowers may be able to hang onto their homes by refinancing. But the more likely outcome is that they'd escape foreclosure, sell their homes the traditional way and save their credit, Blomquist said.

Still, while some people have seen their home values soar and lift them into positive equity, about 9.3 million homes, representing 19 percent of all properties with a mortgage, were seriously underwater in the fourth quarter. Here's RealTrac's breakdown of states with the highest percentage of seriously underwater properties: