Mortgage lenders would have to write-down about $89 billion in losses if Congress ever decides to enact legislation making across-the-board principal reductions mandatory for borrowers who are underwater, a new report from Black Knight Financial Services shows.
Principal reductions on delinquent underwater mortgages held by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac alone would require up to $18 billion in relief, according to the firm's October Mortgage Monitor report.
Currently, there are about 4 million borrowers in the U.S. who are underwater on their mortgages. Of these, the average amount of negative equity is around $39,000.
These borrowers are collectively more than $157 billion underwater, Black Knight estimates.
‘Over the past two-and-a-half years, there has been sustained and continual improvement in the number of underwater borrowers in this country,’ says Trey Barnes, Black Knight's senior vice president of loan data products, in a release. ‘From 33.5 percent of borrowers being in negative equity positions in January 2012, we're now looking at less than eight percent of borrowers underwater.
‘However, there are still four million borrowers who owe more on their mortgages than their homes are worth, despite more than two years of relatively steady home price appreciation,’ Barnes adds. ‘Borrowers in negative equity positions represent $800 billion dollars of mortgage debt overall, with some $157 billion of that being underwater, and the data shows these borrowers are 10 times more likely to be delinquent than those with positive equity.
As Barnes points out, there has been ‘a great deal of debate around the issue of principal reductions for these delinquent borrowers.’ For example, a recent Senate Banking Committee hearing featured discussions regarding possible principal write-downs for delinquent underwater borrowers.
‘With an aggregate 40 percent delinquency rate among borrowers with current combined loan-to-value (CLTV) ratios above 100 percent – a number that rises to over three out of every four for severely underwater borrowers (those with CLTVs of 150 percent or higher) – the scope and cost of such write-downs would be immense,’ Barnes says. ‘Some $89 billion in principal reductions would be required to right-side these borrowers.’
Meanwhile, the report finds that mortgage lenders loosened credit for refinances in October, with the average credit score for GSE refinances at 742 for the month, down from a high of 766 in late 2011.
Credit requirements on GSE purchase mortgages, on the other hand, remained tight with average credit scores averaging around 757 – basically unchanged since 2009.
The total U.S. loan delinquency rate was 5.44% in October – down 4.14% compared to September.
The presale foreclosure inventory rate was 1.69%, down 3.93% compared to September.
States with the highest percentage of delinquent (30-plus days past due) loans in October included Mississippi, New Jersey, Louisiana, New York and Florida.
States with the lowest percentage of delinquent loans included Montana, Colorado, South Dakota, Arkansas and North Dakota.
States with the highest percentage of seriously delinquent (90-plus days past due) loans included Mississippi, Rhode Island, Alabama, Louisiana and Arkansas.
