How’s this for a negative equity data point: the majority of borrowers whose home loans have been wrapped into a US residential mortgage backed securities transaction owe more on their mortgages than their homes are currently worth, according to Fitch.
In a report released on Tuesday, the rating agency estimated approximately 60 per cent of the remaining performing borrowers from the 2006-2007 vintages are underwater.
Two aspects of that assertion immediately stand out. The first is that these borrowers are still considered “performing”, meaning they aren’t late on their payments and are certainly not in foreclosure. Given the not-irrational propensity of borrowers in negative equity to walk away from their homes, that statistic bodes ill for the already depressed US housing market.
The second point of interest has to do with the vintages. RMBS issued in 2006 and 2007, be they prime, subprime or Alt-A, are widely viewed as being exposed to mortgages issued with scant regard for underwriting standards.
In January 2008, for instance, S&P revised its expected losses for the 2006 vintage subprime collateral to 19 per cent from 14 per cent amid rapidly rising delinquencies; Moody’s made similarly downbeat revisions a month later. Fitch moved in June of that year to tweak its projections for losses on 2006 Alt-A securities, a month after S&P downgraded $34bn worth of such Alt-A backed RMBS issued in the first half of 2007.
The following charts provide of a vivid illustration of the relative losses by vintage:
Extrapolating from those revisions, it’s fair to say not all of those underwater borrowers identified by Fitch – some of whom probably benefited from NINJA loans – are going to remain performing for long.
As Fitch put it:
negative equity reduces a borrower’s inventive to pay their mortgage and limits their options when faced with financial difficulties
The rating agency noted the percentage of previously performing borrowers who had rolled into delinquency in September “increased modestly”, and “the number of distressed borrowers has continued to grow.”
In September, the number of borrowers with non-agency mortgages – or loans not issued by Fannie Mae, Freddie Mac or Ginnie Mae – who were more than 90 days delinquent on their loans reached a record 1.66m.
What this all means for house prices – to say nothing of potential bank write downs – is stark:
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
Related links:
US commercial and residential real estate datapoints still dismal – FT Alphaville
Deutsche Bank on those drowning US homeowners – FT Alphaville