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Half of U.S. Residential Mortgages Underwater by 2011
August 25, 2009 by Neil · 7 Comments
The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.
Home price declines will have their biggest impact on prime “conforming” loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.
“We project the next phase of the housing decline will have a far greater impact on prime borrowers,” Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41 percent will be “underwater” by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29 percent, it said.
“The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding,” the analysts said. Prime jumbo loans make up 13 percent of the total market.
Deutsche’s dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.
Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.
Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were “affordability products” originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,
Of option adjustable-rate mortgages — which cut payments by allowing principal balances to rise — 89 percent will be underwater in 2011, up from 77 percent, the report said.
Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.
“For many, the home has morphed from piggy bank to albatross,” the analysts said.
Source: About half of U.S. mortgages seen underwater by 2011, Al Yoon, Yahoo! News, 8/5/09
Comment: You might think that more people throwing their keys to the bank will mean more people renting, decreasing rental supplies, and increasing rents. In fact, rents have dropped across the board in New York City. See here and here. Locally, dispossessed ex-homeowners will pay the rent they can afford, whether it means moving to the less expensive parts of Manhattan, the outer boroughs, or outside New York City. Rents will continue to plummet, in no small part because banks are not lending money to purchase real estate, or for small businesses. One prominent apartment building owner I spoke with told me that his rents are down 30% across the board. And there’s no sign that the down arrow is reversing course anytime soon…
Update 10/19/09: To see the report in full from Deutsche Bank, click here.
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7 Responses to “Half of U.S. Residential Mortgages Underwater by 2011”Trackbacks
Check out what others are saying about this post...[...] that we’re out of the woods. If unemployment numbers continue to kiss 10% for adult men, and foreclosures continue as more properties’ values go underwater, we’re probably not on the upslope of a V-shaped recovery. We’re probably approaching a [...]
[...] system in a size and scope that Robert Moses imagined, and China implements, and refinance the growing stock of underwater homes. This would create more jobs, higher occupancies, diminishing vacancy rates, and higher rents. [...]
[...] the government is purchasing these new mortgages, it is not actively working to help the current homeowners who are (or are about to be) underwater. This is a tsunami in the making: Half of U.S. residential mortgages will be underwater by 2011. [...]
[...] if this is done, there still is a tsunami of bad mortgage loans coming to roost. If half of all residential mortgages are going to be underwater by 2011, the government has to buy the underwater residential mortgages and refinance them. This will allow [...]
[...] (to both of you). Unfortunately, though, 17% of the nation is unemployed or underemployed. Half of all homes will have negative equity by 2011. Seven million housing units comprise the shadow housing inventory that has not been factored into [...]
[...] To add to the growing bad news, the majority — 60% — of remaining performing borrowers within ‘06- and ‘07-vintage residential mortgage-backed securities (RMBS) bear negative home equity. This is not to be confused with the fact that half of all residential homes will have negative equity by the end of next year. [...]
[...] November 24, 2009 by Neil · Leave a Comment Today’s WSJ reports that 23% of homeowners owe more than the current value of their homes. While this is front-page news, it is not surprising to those who have been tracking this trend. Back in August, we expected that half of all U.S. homeowners would be underwater by 2011. [...]