Negative home equity is preventing sustained improvement in US mortgage performance, according to a new report from Fitch. The agency estimates that approximately 60% of the remaining performing borrowers from the 2006-2007 vintages are in a negative home equity position, or 'underwater'.

According to Fitch senior director Grant Bailey: "Negative equity reduces a borrower's incentive to pay their mortgage and limits their options when faced with financial difficulties."

After notable improvement through the first half of this year, the percentage of previously performing borrowers rolling into a delinquency status stabilised at an elevated level through the summer months and increased modestly in the month of September. The sustained negative pressure on the remaining performing borrowers has also been driven in part by the continued rise in unemployment, which has reached 9.8% nationally and a record level of 12.2% in California, where the greatest percentage of RMBS borrowers is located. As projected in its 1 October 'Global Economic Outlook', Fitch projects that US unemployment will continue to rise and peak at 10.3% in the middle of 2010.

Despite positive home price figures over the summer, the agency forecasts over the next year a further home price decline of approximately 10% nationally, when weighted by outstanding mortgages. Home price figures in recent months were temporarily helped by the reduced share of distressed property liquidations due to foreclosure moratoriums and servicers' increased efforts to qualify borrowers for modifications. However, the number of distressed borrowers has continued to grow.

The number of non-agency borrowers at least three payments behind on their mortgage reached 1.66 million in September, according to LoanPerformance - the highest level on record. Bailey adds: "While increased modification efforts and an extension of the First Time Home Buyer tax credit may help home prices, the ultimate increase in liquidations from the growing distressed inventory will likely cause a further price decline."

With further employment and home price deterioration expected, Fitch projects performing-to-delinquency roll-rates to remain elevated across the prime, Alt-A and subprime RMBS sectors into 2010.