Financial institutions are far from drowning because of underwater mortgages, with the impact of these loans mostly behind them, according to a new report from Fitch Ratings.
While the negative equity rate nationwide stands at around 11%, most mortgage-dependent financial institutions, including mortgage insurers, title insurers and lenders, don't need to worry about underwater loans affecting their credit profiles, Fitch said in a press release Friday.
"Underwater mortgages have some potential to impede homeowners from listing their homes, thus affecting available inventories, home prices and overall mortgage activity," Fitch said in the release. "However, as most homeowners are not contending with underwater mortgages, most financial institutions should still find a large-enough market for their services."
The remaining effects of underwater mortgages differ though from one type of institution to another.
For mortgage insurers, many of the 97% loan-to-value loans from before the crisis are outstanding, forming a significant but diminishing share of the firms' total risk-in-force. Many have benefited from loan modification programs, but nevertheless some borrowers with modified mortgages may redefault with worse recoveries than if no modification had occurred.
Large and midtier regional banks and community banks, meanwhile, face higher losses given that they hold underwater mortgages that are more prone to defaults. Still, these losses should already be reflected in allowances, Fitch said, and rising home values should have a stronger influence on the underlying assets in the future.
On the other hand, title insurers should experience fewer problems stemming from underwater mortgages, Fitch said. While the more underwater markets, including Arizona, Florida and Nevada, make up nearly a quarter of total title direct written premiums in 2014, none of the four major title insurance companies have greater than a 21% concentration to any of these states.
Additionally, Fitch estimated that title insurance revenue will grow modestly in 2015 with rising prices.
