Negative Equity and Mortgage Market Losses
One of the issues that is more likely to affect “regular folks” than $700 billion bailout plans for Wall Street and Very Large Drops in the stock market, is negative equity.
Negative equity is something that is affecting a great deal of homeowners right now. This is because as home values drop, then what is owed on second home mortgage loans, HELOCs and even first mortgage loans exceeds how much the house is worth. This is a problem that afflicts more than just subprime borrowers. The massive losses in home values affects a wide swath of society. And some of them will not be able to keep up with the payments and the negative equity will swamp them.
Happily, though, not everyone who has negative equity now is going to go under and foreclose. Many people are in a position where they can ride this out and keep up with their payments. In a few more years — in most cases — that means that the housing market will turn around and the equity will all be positive. But until then, the mortgage market is going to see some serious losses. Calculated Risk figures some of the possibilities for mortgage market losses due to this housing market problem:
Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders.
I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses. If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion.
You can see where this could mean continued problems for the mortgage market, companies and the stock market. It’s time to strap in (if you haven’t already) and get ready for a wild ride.
Tags: HELOC, negative equity, home mortgage loan, second home mortgage,
second mortgage, $700 billion bailout, mortgage market losses
