Negative Equity Data Show QRM Will Mostly Affect Hardest Hit Markets
CoreLogic reports that the 27.9% of all U.S. homeowners with negative and near-negative equity mortgages are highly vulnerable to the 20% downpayment proposed by the Dodd-Frank Act.
Data indicate the effort to lower loan origination costs through the “qualified residential mortgage” designation set forth by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that exempts lenders from risk retention requirements for the loans to be securitized may be counterproductive.
The QRM’s 20% downpayment feature that serves that goal and is supported by lenders and securitizers may “adversely affect” the overall housing market since “the majority of homebuyers are repeat buyers who use current equity as the bulk of their” asset value.
Data show by yearend 2010 the aggregate volume of negative equity reached $750 billion of which $450 billion includes borrowers who are upside down by over 50%. These billions of dollars, which could have translated into new home purchasing power, are unavailable and represent a financial burden that Mark Fleming, chief economist at CoreLogic, describes as captivity for millions of borrowers.
And the QRM adds another long-term challenge.
By the end of the fourth quarter of 2010, 11.1 million homeowners, or 23.1% of all residential properties with a mortgage, were in negative equity, up from 10.8 million, or 22.5% in the third quarter. An additional 2.4 million borrowers had less than 5% equity, defined as near-negative equity by the end of the fourth quarter in times when home prices continue to drop.
CoreLogic warns that that risk is higher even in states with lower proportions of borrowers with 80% LTV or less “because repeat buyers will not have sufficient down payments to buy new homes with QRMs.”
The aggregate level of negative equity, which increased from $744 billion in 3Q10 but remains below the $800 billion reported by 4Q09, may swing again following home price fluctuations. And home prices—which by consensus will fall another 5% to 10% in 2011—are expected to increase negative equity by another 10 percentage points.
As of now according to the Clear Capital February Home Data Index report that shows despite a national trend “toward flattening of home prices,” which are up 4.2% compared to 2009, home prices were down 1.4% quarter-over-quarter with the West region continuing to feature the strongest price declines.
Clear Capital finds that as eight of the country’s 15 lowest-performing major markets are in the West if the current trends continue “the West region will double dip” by the end of the first quarter of this year.
Similarly, 12 of the 15 highest performing major markets that have been posting “solid quarter-over-quarter gains,” continued to improve over February as well.
CoreLogic finds that current price movements are as important as the share of at-risk loans, or loans with less than 10% equity. So ultimately these factors will have a different impact at the state level.
For example, CoreLogic calculations show that 54% of all U.S. homeowners with mortgages would qualify for a QRM exemption if they have 20% equity or more in their home.
Homeowners in Nevada and other hard-hit foreclosure states, such as Florida, Arizona, Georgia and Colorado, will be the most negatively impacted by the 20% QRM exemption.
Given price declines, the states with largest risk of future increases in negative equity are Alabama, Idaho and Oregon that feature both a high “share of loans that are near negative equity and rapid home price depreciation.”
At the same time, while Colorado, Tennessee and North Carolina appear to be the riskiest markets because 16% or more of loans are at risk of going under water, expectations of only “moderate price declines” will moderate said risk.
A property is referred to as “underwater” when borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both—which is why the states with highest negative equity levels also feature the worst loan-to-value ratios.
Nevada had the highest negative equity percentage with 65% of all of its mortgaged properties underwater, followed by Arizona at 51%, Florida at 47%, Michigan at 36% and California at 32%.
Also the highest LTV average for properties with a mortgage were in Nevada at 118%, followed by Arizona at 95%, Florida at 91%, Michigan at 84% and Georgia at 81%.
The distribution of LTV however varies greatly by state.
For example, California has a higher share of borrowers with 60% or less LTV compared to Texas even though California has a negative equity share that is three times higher than Texas.
Florida and Michigan have fairly similar concentrations of low LTV loans, but above 70% LTV the profiles of the states begin to diverge with Florida, significantly worse than Michigan.
New York had the lowest LTV at 50%, followed by Hawaii at 54%, District of Columbia at 58%, Connecticut at 60% and North Dakota at 60%.
Over 70% of borrowers in New York, Hawaii and North Dakota would qualify, so the impact of the QRM in those states will be smaller compared to the rest of the U.S. At less than 7% New York, North Dakota and Hawaii have very low shares of at-risk loans, plus prices in these markets are still increasing, so the risk is minimal.