California Study Shows Negative Equity/Delinquency Correlation

A recent Fitch Ratings study of securitized non-agency mortgages in California shows high delinquency rates triggered by the level of negative equity can produce "dramatic differences" in local loan performance. The study found that California's 60-plus day delinquency rates for prime loans are at 12%, compared to 10% nationally; for option ARM loans it was 47% compared to 46% nationally, and for subprime loans it was 50% compared to 47% nationally. While mortgage performance in the state "is not substantially different" from the rest of the country, regions with the largest home price increases have also seen "the most precipitous declines," Fitch said. The disparity between various regions within the state's 382 metropolitan statistical areas tracked by Fitch is so great that California is home to both the best performing region in the country (San Francisco-San Mateo-Redwood City in San Francisco) and some of the country's worst performing markets. For example, in Riverdale 90% of the mortgages are now "under water" and 60% of borrowers owe over 150% of the value of their home. Also, in Riverside the prime 60-plus day delinquency rate is 23% or five times higher than the 4% rate in San Francisco. The pattern is consistent among all loan types, including nonprime, option ARM and Alt-A loans, according to Fitch.