$89 billion: The price to save America's underwater borrowers

by MPA04 Dec 2014
In light of the most recent Senate Banking Committee hearing, which featured discussions regarding possible principal write-downs for underwater borrowers, Black Knight Financial Services examined the latest available data in order to quantify the scope of the issue.

In its latest Mortgage Monitor Report, Black Knight found the U.S. has approximately four million borrowers in negative equity positions, representing nearly $800 billion in outstanding balances. The report also discovered around $89 billion in principal reductions would be required to save underwater borrowers in America.

“Over the past two-and-a-half years, there has been sustained and continual improvement in the number of underwater borrowers in this country,” said Trey Barnes, senior vice president of loan data products at Black Knight . “From 33.5% of borrowers being in negative equity positions in January 2012, we’re now looking at less than 8% of borrowers underwater."

However, there are still four million borrowers who owe more on their mortgages than their homes are worth, despite more than two years of relatively steady home price appreciation, according to Barnes. Borrowers in negative equity positions represent $800 billion dollars of mortgage debt overall, with some $157 billion of that being underwater, and the data showed these borrowers are 10 times more likely to be delinquent than those with positive equity.

“There is understandably a great deal of debate around the issue of principal reductions for these delinquent borrowers. With an aggregate 40 percent delinquency rate among borrowers with current combined loan-to-value ratios above 100%  -- a number that rises to over three out of every four for severely underwater borrowers (those with CLTVs of 150 percent or higher) -- the scope and cost of such write-downs would be immense," added Barnes. "Some $89 billion in principal reductions would be required to right-side these borrowers. For the 365,000 delinquent underwater loans backed by Fannie Mae and Freddie Mac alone, nearly $18 billion in write-downs would be called for.”

Looking at the appetite for risk in mortgage lending, this month’s Mortgage Monitor found that, while still historically high, there has been some relaxation in credit requirements for refinance originations, according to Black Knight. Weighted average credit scores for GSE refinances have come down to 742 from a high of 766 in late 2011. Credit requirements on GSE purchase mortgages, on the other hand, have remained tight, with average credit scores remaining relatively steady since 2009 and currently at 757.

Looking at GNMA-backed originations -- historically serving borrowers with lower credit profiles -- Black Knight reported seeing some relaxation in refinance credit requirements, with a weighted average credit score of 701. This is markedly higher, though, than the pre-crisis average of 628 in 2005. Likewise, credit scores on GNMA purchase loans are now an average of 703, up sharply from 2005’s 660 average.

You might also like: Predicting the impact from future HELOC loan resets.


  • by Wm Matz | 12/4/2014 12:14:43 PM

    There are so many factors in the underwater homes that we are unlikely ever to get agreement on a solution, e.g.:
    - Can we distinguish between borrowers who were victims of predatory lending and those who were greedy?
    - For borrowers who have lost jobs, will writedown save house, or just throw good money after bad?
    - For investor-owned mortgages, gov't payments actually benefit banks who would otherwise have to pay investors for misrepresented RMBS.
    - For good RMBS [if any], should gov't bail out investors who took risks for high returns?

    The article fails to consider in the $89B estimate that if all those mortgages were to go to foreclosure, the likely losses would be 2X-4X the $89B figure due to foreclosure costs and delays. The article also fails to take into account the looming resets of HELOCs, the HAMP mod adjustments after 5 years, interest-only ARMS going to full amortization, interest rates rising generally, and a widespread softening in the real estate market. The combination of all of these factors suggests there is no readily apparent solution.


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