Product Code Database
Negative equity is a deficit of owner's equity, occurring when the value of an asset used to secure a loan is less than the outstanding balance on the loan. America's foreclosure plan: Can’t pay or won’t pay?, Paragraph 5, The Economist (February 19, 2009). In the United States, assets (particularly real estate, whose loans are Mortgage loan) with negative equity are often referred to as being " underwater", and loans and borrowers with negative equity are said to be " upside down".
People and companies alike may have negative equity, as reflected on their .
Since 2007, those most exposed to negative equity are borrowers who obtained loans of a high percentage of the property value (such as 90% or even 100%). These were commonly available before the credit crunch.
It is also common for negative equity to occur when the value of a good drops shortly after its purchase. This occurs frequently in automobile loans, where the market value of a car might drop by 20-30% as soon as the car is driven off the lot.
While typically a result of fluctuating asset prices, negative equity can occur when the value of the asset stays fixed and the loan balance increases because loan payments are less than the interest, a situation known as negative amortization. The typical assets securing such loans are real property – commercial, office or residential. When the loan is Nonrecourse debt, the lender can only look to the security, that is, the value of the property, when the borrower fails to repay the loan.
In the United States, student loans are rarely dischargeable in bankruptcy, and typically lenders provide student loans without requiring security. This stands in contrast to lenders requiring borrowers to have an equity stake in a comparably-sized real estate loan, as described above, secured by both a down payment and a mortgage. An explanation for the willingness of creditors to provide unsecured student loans is that, in a practical sense, American student loans are secured by the borrower's future earnings. This is so since creditors may legally garnish wages when a borrower defaults.
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