Negative equity

CoreLogic: 11.1 Million U.S. Properties with Negative Equity in Q4, Calculatedriskblog.com

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CoreLogic released the Q4 2011 negative equity report today.

CoreLogic … today released negative equity data showing that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011. This is up from 10.7 million properties, 22.1 percent, in the third quarter of 2011. An additional 2.5 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.8 percent of all residential properties with a mortgage nationwide in the fourth quarter, up from 27.1 in the previous quarter. Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter.

“Due to the seasonal declines in home prices and slowing foreclosure pipeline which is depressing home prices, the negative equity share rose in late 2011. The negative equity share is back to the same level as Q3 2009, which is when we began reporting negative equity using this methodology. The high level of negative equity and the inability to pay is the ‘double trigger’ of default, and the reason we have such a significant foreclosure pipeline. While the economic recovery will reduce the propensity of the inability to pay trigger, negative equity will take an extended period of time to improve, and if there is a hiccup in the economic recovery, it could mean a rise in foreclosures.” said Mark Fleming, chief economist with CoreLogic.

Here are a couple of graphs from the report:

CoreLogic, Negative Equity by StateClick on graph for larger image.

This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:

“Nevada had the highest negative equity percentage with 61 percent of all of its mortgaged properties underwater, followed by Arizona (48 percent), Florida (44 percent), Michigan (35 percent) and Georgia (33 percent). This is the second consecutive quarter that Georgia was in the top five, surpassing California (29 percent) which previously had been in the top five since tracking began in 2009. The top five states combined have an average negative equity share of 44.3 percent, while the remaining states have a combined average negative equity share of 15.3 percent.”

CoreLogic, Distribution of EquityThe second graph shows the distribution of equity by state- black is Loan-to-value (LTV) of less than 80%, blue is 80% to 100%, red is a LTV of greater than 100% (or negative equity). Note: This only includes homeowners with a mortgage – about 31% of homeowners nationwide do not have a mortgage.

Some states – like New York – have a large percentage of borrowers with more than 20% equity, and Nevada, Arizona and Florida have the fewest borrowers with more than 20% equity.

Some interesting data on borrowers with and without home equity loans from CoreLogic: “Of the 11.1 million upside-down borrowers, there are 6.7 million first liens without home equity loans. This group of borrowers has an average mortgage balance of $219,000 and is underwater by an average of $51,000 or an LTV ratio of 130 percent.

The remaining 4.4 million upside-down borrowers had both first and second liens. Their average mortgage balance was $306,000 and they were upside down by an average of $84,000 or a combined LTV of 138 percent.”

 

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Oregon’s Shadow Inventory – The “New Normal”?, by Phil Querin, Q-Law.com

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The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while.  “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from theRMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year.  The main reason is due to the volume of  “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment.  Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number.  By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.

As long as we have shadow inventory, prices will remain depressed.[1] Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed.  In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale.  [A good example of this was the first batch of South Waterfront condos that went to auction in 2009.  The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]

All of these factors combine to destroy market equilibrium.  That is, short sellers’ motivation is distorted.  Homeowners with negative equity have little or no bargaining power.  Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell.  Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures.  A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes.  While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.

So, the vicious circle persists.  In today’s world of residential real estate, it is a fact of life.  The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process.  They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs.  This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.

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PMI to pay underwater borrowers to stay put by by Jacob Gafney, Housingwire.com

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Private mortgage insurer PMI Group (PMI: 1.34 -11.26%) will offer cash incentives to some homeowners in negative equity to help prevent mortgage defaults.

PMI subsidiary, Homeowner Reward is working with Loan Value Group, to administer the pilot program, called Responsible Homeowner Reward.

The program launched Monday and will start in select real estate markets where falling house prices left borrowers owing significantly more on their mortgage than what the property is worth.

Participation in RH Reward is voluntary and there is no cost to the homeowner, according to PMI. The cash will come after a lengthy period of keeping the mortgage current, generally from 36 to 60 months. According to PMI, the reward will be between 10 to 30% of the unpaid principal balance.

The Loan Value Group works “to positively influence consumer behavior on behalf of residential mortgage owners and servicers,” according to its website.

LVG programs already delivered more than $100 million in cash incentives to distressed homeowners. However, those programs focus on turnkey solutions such as cash for keys, with an aim to avoid principal forgiveness. The Homeowner Reward program is taking a different path.

“We continue to seek creative and effective loss mitigation strategies,” said Chris Hovey, PMI vice president of servicing operations and loss management. “PMI is especially supportive of homeownership retention efforts in states that are facing unprecedented housing challenges.”

Write to Jacob Gaffney.

Follow him on Twitter @jacobgaffney.

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Home equity picture improves, a little, by Wendy Culverwell, Portland Business Journal

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The number of homes worth less than their outstanding mortgages fell slightly in the first three months, according to figures released Tuesday by CoreLogic Inc. (NYSE: CLGX), a Santa Ana, Calif.-based real estate data firm.

According to CoreLogic, 27.2 percent — or 13.5 million homes — had negative or near-negative equity in the first quarter. That compares to 27.7 percent in the fourth quarter of 2010.

In Oregon, 17.2 percent of homes are worth less than their mortgages and another 5.8 percent had near-negative equity. Collectively, Oregonians owe $121.9 billion on 696,142 mortgages on properties worth a total of $175 billion.

“The current economic indicators point to slow yet positive economic growth, which will slowly reduce the risk of borrowers experiencing income shocks,” said Mark Fleming, chief economist with CoreLogic. “Yet the existence of negative equity for the foreseeable future will weigh on the housing market recovery by holding back sale and refinance activity.”

Negative equity occurs when a borrower owes more than the home is worth. “Near-negative” refers to homes with less than 5 percent equity, a figure that would be wiped out by transaction costs if the property were sold.

In Washington state, 16.9 percent of homes had negative equity and 5.8 percent had near-negative equity. Collectively, Washingtonians owe $291.7 billion on 1,412,110 mortgages on properties worth a total of $429.1 billion.

Nevada, where 63 percent of all mortgaged homes are worth less than the outstanding loan balance, led the nation for negative equity. The other top five states were Arizona, 50 percent, Florida, 46 percent, Michigan, 36 percent and California, 31 percent. Nevada, Arizona and Florida showed improvement from the prior quarter.

The average “underwater” home is worth $65,000 less than the outstanding mortgage balance.

Read more: Home equity picture improves, a little | Portland Business Journal

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Strategic Default: Inconceivable Assumptions Suddenly Conceivable, by Tim Rood, Mortgagenewsdaily.com

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Until recently it was generally believed that only a small fraction of Americans would willingly choose to skip their monthly mortgage payment, aka “strategically default”, when they found themselves stuck in a negative equity situation.

The logic driving this belief was based on the notion that borrowers wouldn’t want to damage their credit profile or deal with the social stigma surrounding a public foreclosure. The assumption that most underwater borrowers will continue making their monthly payments (absent a life event) is factored into the analytics of risk managers, buyers and sellers of mortgage related assets, servicing managers, and regulators across the country.

What if this assumption is wrong? Is that inconceivable?

It wasn’t long ago when conventional wisdom convinced us that lenders would never make loans to borrowers that had virtually zero likelihood of being able to pay the loans back. In a 2010 study conducted by the Cato Institute, it was estimated that there were over 27 million Alt-A and subprime loans in the system by mid-2008. That’s approximately 50 percent of all loans in the market.  Remember when we thought home price would never fall on a national level? Never been done and won’t ever happen, right? That assumption was shattered when home values nationally dropped between 30-50% from their peak in 2006, wiping out roughly $7 trillion of home equity in the process.

Fannie Mae recently published it’s latest National Housing Survey and exposed disturbing patterns and sentiments with American homeowners. For example,  46% of borrowers are “stressed” about their underwater mortgage, up from 11% in June 2010. That’s an alarming four-fold increase in three quarters. That statistic becomes even more concerning when viewing the sheer number of borrowers faced with negative equity. At the end of 2010, which doesn’t include the home price declines seen in 2011, CoreLogic estimated that 11.1 million homes, or 23.1 percent of all homes with a mortgage, were underwater. Think about those two stats this way – every morning, 46% of the estimated 11.1 million underwater borrowers wake up and debate why they should keep paying their monthly mortgage payment. Further weighing on borrowers is that  47% of borrowers surveyed reported higher household expenses than the year before…

From that perspective, it doesn’t seem inconceivable that our assumptions might be off base again. Is principal forgiveness the answer?

Probably not, and here’s why. Remember how many folks HAMP was supposed to save by giving them new loan terms? The number touted by the administration was over 4 million. In reality, the number is likely to come in around 500-750,000 permanent modifications. Imagine the scenario when a government sponsored principal reduction program is announced. Out of the 11 million underwater borrowers – you’ll probably get three times as many borrowers applying for relief. Maybe one tenth of them will actually qualify and be granted a principal reduction. In the meantime, some 20+ million applicants would have stopped making payments to “qualify” or be considered for qualification. How many of them will be able to or even want to get current again after they are turned down?

Like it or not, we have got to find ways to stabilize home prices, reward responsible behavior among existing homeowners, and encourage home buying. I don’t see any ideas on the table that would accomplish any of these objectives…. and the effects are starting to show up in data.

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Strategic Defaults Revisited: This Could Get Very Ugly, by Keith Jurow, Minyanville.com

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In an article posted on Minyanville last September — Strategic Defaults Threaten All Major US Housing Markets — I discussed the growing threat that so-called “strategic defaults” posed to major metros which had experienced a housing bubble. With home prices showing renewed weakness again, now is a good time to revisit this important issue.

What Is Meant By Strategic Default?

According to Wikipedia, a strategic default is “the decision by a borrower to stop making payments (i.e., default) on a debt despite having the financial ability to make the payments.” This definition has become the commonly accepted view.

I define a strategic defaulter to be any borrower who goes from never having missed a payment directly into a 90-day default. A good graph which I will discuss shortly illustrates my definition.

Who Walks Away from Their Mortgage?

When home prices were rising rapidly during the bubble years of 2003-2006, it was almost inconceivable that a homeowner would voluntarily stop making payments on the mortgage and lapse into default while having the financial means to remain current on the loan.

Then something happened which changed everything. Prices in most bubble metros leveled off in early 2006 before starting to decline. With certain exceptions, home prices have been falling quite steadily since then around the country. In recent memory, this was something totally new and it has radically altered how most homeowners view their house.

In those major metros where prices soared the most during the housing bubble, homeowners who have strategically defaulted share three essential assumptions: 

  • The value of their home would not recover to their original purchase price for quite a few years.
  • They could rent a house similar to theirs for considerably less than what they were paying on the mortgage.
  • They could sock away tens of thousands of dollars by stopping mortgage payments before the lender finally got around to foreclosing.

Put yourself into the mind and shoes of an underwater homeowner who held these three assumptions. Can you see how the temptation to default might be difficult to resist?

Who Does Not Walk Away?

Most underwater homeowners continue to pay their mortgage. An article posted online in early February by USA Today discusses the dilemma faced by underwater homeowners in Merced, California, a city which has suffered one of the steepest collapses in home prices since their bubble burst in 2006.

The author cites the situation of one couple who had bought their home in 2006 for $241,000. They doubted it would bring more than $140,000 today. The husband considered the idea of looking for a better job in another state. But that meant selling the house for a huge loss or giving the house back to the bank and walking away. They refused to do that. The reason was simple in their mind. They made an agreement when they took out the mortgage.

The same explanation was given by another couple in their 50s who owe $375,000 on their loan and believe it would not sell for more than $150,000. They both work and can afford the mortgage payment. They are very attached to their home and feel a moral obligation to pay the mortgage. Yet they know that many others have walked away. Because they refuse to bail out of their loan, they concede that they are stuck and described their situation as a “bitter pill.”

Two Key Studies Show that Strategic Defaults Continue to Grow

Last year, two important studies were published which have tried to get a handle on strategic defaults. First came an April report by three Morgan Stanley analysts entitled “Understanding Strategic Defaults.”

The study analyzed 6.5 million anonymous credit reports from TransUnion’s enormous database while focusing on first lien mortgages taken out between 2004 and 2007.

The authors found that loans originated in 2007 had a significantly higher percentage of strategic defaults than those originated in 2004. The following chart clearly shows this difference.

chart

Why are the 2007 borrowers strategically defaulting much more often than the 2004 borrowers? Prices were rising rapidly in 2004 whereas they were falling in nearly all markets by 2007. So the 2007 loans were considerably more underwater than the 2004 loans.

Note also that the strategic default rate rises very sharply at higher Vantage credit scores. (Vantage scoring was developed jointly by the three credit reporting agencies and now competes with FICO scoring.)

Another chart shows us that even for loans originated in 2007, the strategic default percentage climbs with higher credit scores.

chart

Notice in this chart that although the percentage of all loans which defaulted declines as the Vantage score rises, the percentage of defaults which are strategic actually rises.

A safe conclusion to draw from these two charts is that homeowners with high credit scores have less to lose by walking away from their mortgage. The provider of these credit scores, VantageScore Solutions, has reported that the credit score of a homeowner who defaults and ends up in foreclosure falls by an average of 21%. This is probably acceptable for a borrower who can pocket perhaps $40,000 to $60,000 or more by stopping the mortgage payment.

Why Do Homeowners Strategically Default?

Is there a decisive factor that causes a strategic default? To answer this, we need to turn to the other recent study.

Last May, a very significant analysis of strategic defaults was published by the Federal Reserve Board. Entitled “The Depth of Negative Equity and Mortgage Default Decisions,” it was extremely focused in scope. The authors examined 133,000 non-prime first lien purchase mortgages originated in 2006 for single-family properties in the four bubble states where prices collapsed the most — California, Florida, Nevada, and Arizona. All of the mortgages provided 100% financing with no down payment.

By September 2009, an astounding 80% of all these homeowners had defaulted. Half of these defaults occurred less than 18 months from the origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study’s observation period ended, median prices had fallen by roughly another 20%.

This study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different stages of being underwater.

chart
Source: 2010 FRB study

Notice that the percentage of defaults which are strategic rises steadily as negative equity increases. For example, with FICO scores between 660 and 720, roughly 45% of defaults are strategic when the mortgage amount is 50% more than the value of the home. When the loan is 70% more than the house’s value, 60% of the defaults were strategic.

This last chart focuses on the impact which negative equity has on strategic defaults based upon whether or not the homeowner missed any mortgage payments prior to defaulting.

chart
Source: 2010 FRB study

This chart shows what I consider to be the best measure of strategic defaulters. It separates defaulting homeowners by whether or not they missed any mortgage payments prior to defaulting. As I see it, a homeowner who suddenly goes from never missing a mortgage payment to defaulting has made a conscious decision to default.

The chart reveals that when the mortgage exceeds the home value by 60%, roughly 55% of the defaults are considered to be strategic. For those strategic defaulters who are this far underwater, the benefits of stopping the mortgage payment outweigh the drawbacks (or “costs” as the authors portray it) enough to overcome whatever reservations they might have about walking away.

Where Do We Go From Here?

The implications of this FRB report are really grim. Keep in mind that 80% of the 133,000 no-down-payment loans examined had gone into default within three years. Clearly, homeowners with no skin in the game have little incentive to continue paying the loan when the property goes further and further underwater.

While the bulk of the zero-down-payment first liens originated in 2006 have already gone into default, there are millions of 80/20 piggy-back loans originated in 2004-2006 which have not.

We know from reports issued by LoanPerformance that roughly 33% of all the Alt A loans securitized in 2004-2006 were 80/20 no-down-payment deals. Also, more than 20% of all the subprime loans in these mortgage-backed security pools had no down payments.

Here is the most ominous statistic of them all. In my article on the looming home equity line of credit (HELOC) disaster posted here in early September (Home Equity Lines of Credit: The Next Looming Disaster?), I pointed out that there were roughly 13 million HELOCs outstanding. This HELOC madness was concentrated in California where more than 2.3 million were originated in 2005-2006 alone.

How many of these homes with HELOCs are underwater today? Roughly 98% of them, and maybe more. Equifax reported that in July 2009, the average HELOC balance nationwide for homeowners with prime first mortgages was nearly $125,000. Yet the studies which discuss how many homeowners are underwater have examined only first liens. It’s very difficult to get good data about second liens on a property.

So if you’ve read that roughly 25% of all homes with a mortgage are now underwater, forget that number. If you include all second liens, It could easily be 50%. This means that in many of those major metros that have experienced the worst price collapse, more than 50% of all mortgaged properties may be seriously underwater.

The Florida Collapse: Is This Where We Are Heading?

Nowhere is the impact of the collapse in home prices more evident than in Florida. The three counties with the highest percentage of first liens either seriously delinquent or in pre-foreclosure (default) are all located in Florida. According to CoreLogic, the worst county is Miami-Dade with an incredible 25% of all mortgages in serious distress and headed for either foreclosure or short sale.

An article posted on the Huffington Post in mid-January 2011 describes the Florida “mortgage meltdown” in grim detail. Written by Floridian Mark Sunshine, it begins by pointing out that 50% of all the residential mortgages currently sitting in private, non-GSE mortgage-backed securities (MBS) were more than 60 days delinquent — either seriously delinquent, in default, bankruptcy, or already foreclosed by the bank. I checked his source — the American Securitization Forum — and the percentage was correct.

The author then goes on to discuss a strategic default situation among his friends in Florida. One of them had purchased a condo in early 2007 for $300,000. By mid-2010, it had plunged in value to less than $100,000 and he decided to stop paying the mortgage. When he expressed his concerns about the possible consequences to his buddies — including an attorney, an accountant, and a doctor — all expressed the same advice to him. They told him to walk away from the mortgage, save his money, and prepare to move to a rental unit. To them, it seemed like a no-brainer.

The author was a little surprised that no one thought there was anything wrong with strategically defaulting. The attorney actually suggested that the defaulter file for bankruptcy to prevent the bank from going after a deficiency judgment for the remaining loan balance after the repossessed property was sold.

The conclusion expressed by the author has far-reaching implications. As he saw it, “More and more Floridians who pay their mortgage feel like chumps compared to defaulters; they turn over their disposable income to the bank and know it will take most of their lifetimes to recover.”

As prices slide to new lows in metro after metro, will this attitude toward defaulting spread from Florida to more and more of the nation? A May 2010 Money Magazine survey asked readers if they would ever consider walking away from their mortgage. The results were sobering indeed:

  • Never: 42%
  • Only if I had to: 38%
  • Yes: 16%
  • Already have: 4%

In late January of this year, a report on strategic defaults issued by the Nevada Association of Realtors seemed to confirm the findings of the two studies I’ve discussed. The telephone survey interviewed 1,000 Nevada homeowners. One question asked was this: “Some homeowners in Nevada have chosen to undergo a ‘strategic default’ and stop making mortgage payments despite having the ability to make the payments. Some refer to this as ‘walking away from a mortgage.’ Would you describe your current or recent situation as a ‘strategic default?’”

Of those surveyed, 23% said they would classify their own situation as a strategic default. Many of those surveyed said that trusted confidants had advised them that strategic default was their best option. One typical response was that the loan “was so upside down it would never have been okay.”

What seems fairly clear from this Nevada survey and the two reports I’ve reviewed is that as home values continue to decline and loan-to-value (LTV) ratios rise, the number of homeowners choosing to walk away from their mortgage obligation will relentlessly grow. That means growing trouble for nearly all major housing markets around the country.

This post originally appeared at Minyanville.

Read more: http://www.businessinsider.com/strategic-defaults-revisited-it-could-get-very-ugly-2011-4#ixzz1KnI0npxu

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