Barclays estimates that half the 2006 and 2007 subprime loans are in or close to negative equity status, which means this roughly $800 billion of mortgages is at greater risk of default. Note that their analysis used OFHEO data; Case-Shiller estimates of the fall in housing prices exceed those of OFHEO, which means this forecast is likely to be conservative.
From Bloomberg:
Subprime loans from the period that are underwater, meaning they exceed the value of the related homes, jumped 5 percentage points to 19.8 percent in the fourth quarter, and may reach 26 percent by midyear if property-price drops continue at the same pace, New York-based analysts Ajay Rajadhyaksha and Derek Chen wrote in a report yesterday. Such Alt-A loans, a grade better than subprime, would grow to 23 percent from 16.3 percent.
Many of the loans that are or will soon be underwater are in areas where prices are falling faster than the U.S. average, so the size of the shift is underappreciated, the Barclays analysts wrote…..
Borrowers on about 26 percent of subprime loans from 2006 and 2007 will have equity of less than 10 percent by midyear, down from 29.4 percent at yearend, according to Barclays, as more borrowers slip underwater. The percentage on Alt-A mortgages should hold steady at about 23.5 percent. The report said 10.8 percent of Alt-A loans were underwater on Sept. 30.
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The real LTVs are much worse: the article doesn’t mention second mortgages.
Who came up with the term “negative equity” and where can I find them to mock them for creating stupid language? There is debt and there is equity. If I have paid off my house, do I have positive debt? No, I did not think so.
If we can have “negative growth” we can have “negative equity” also. They’re all bad euphemisms.
Negative equity is no doubt a growing problem for subprime and Alt-A loans. There seems to be a consensus on that issue.
So what is the government doing to solve the mortgage crisis?
Putting troubled borrowers into 97% LTV loans that are guaranteed by the government. The problems caused by borrowers with little or no skin in the game seemed to be one of the lessons that everyone learned in the last three years, everyone apparently but the people in Congress.
With the rate at which Case Schiller is declining, these loans will have negative equity 90 days after the ink is dry on the paper – actually given the time lag from a commitment to closing, they may be underwater by the time the first payment is due.
This will be 2009’s delinquency story, except this time the write offs will be taken by taxpayers, not banks in the private sector. That may cut into the money available for stimulus checks next spring.
S&P spokesman David M. Blitzer said, “There is no sign of a bottom in numbers [. . .] Prices of single family homes continue to drop across the nation,” (CNNMoney.com 4/29/08). And it appears that the drop in home prices is accelerating. At this rate, according to Baker, as much as $6 trillion in home values could be wiped out from the zenith of the housing market from June, 2006, through the end of this year.
$6 trillion? Doesn’t that really spell an ongoing disaster? That’s far above the $2 trillion estimates that have been floating around the past 9 months. Isn’t the fed (and by extension all of us) now finally between a rock and a hard place? Cut rates and inflation continues to eat away at everything slowly, raise rates and watch financial institutions, mortgages, derivatives blow up? This is like being in a disaster movie.
You have to love cranky people who vent without thinking – and I suspect some spend a lifetime doing just that, patting themselves on the back the whole time for whole smart they are. Debt and negative equity are not the same concept. Debt is how much you owe, which on a $750,000 with a mortgage of $800,000 would be $800,000. Negative equity is the gap between what you owe and the value of the house – here, -$50,000. The term negative equity is an oxymoron, but it captures a mathematical relationship in an easy to understand way. I didn’t invent the term negative equity, but the guy who did is not the idiot on the premises.