Homeowners with negative equity on non-agency loans are vulnerable to default even in cases where they have a history of making their payments on time, according to a new report from Amherst Securities Group.
ASG believes that the market is "underestimating" the housing crisis "and potential losses to bondholders if further policy actions are not taken."
It estimates the non-agency market is $1.3 trillion in size with $414 billion of mortgages in the nonperforming category of 60-days or more late.
The analytics/investment banking firm is pushing for servicers and the government to take decisive action on reducing the principal amount of underwater mortgages, allowing borrowers more financial breathing room.
For non-agency loans with a 120% combined loan-to-value ratio and greater, ASG analysts discovered that almost 21% missed two mortgage payments over a recent 12-month period, compared to 5.2% of borrowers with loans where the home still has equity.
ASG calls its new report a "Facebook" analysis of the non-agency MBS market, and notes that once a mortgage is nonperforming it has a low probability of eventual recovery.
The firm said its findings argue "strongly for modifications with principal reduction."
Amherst analysts say too many housing analysts and investors think that underwater borrowers who are always current will continue to make their payments but these players do not recognize the importance of the borrower's equity status on loan performance.
