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.
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.