CHART OF THE DAY: We're Still Generating Too Many Negative Equity Mortgages

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In Washington, DC, the prevailing view these days is that unemployment is now the leading driver of mortgage defaults. This is one reason you can expect to see the next stage of the government’s attempt to rescue the housing market focus on saving jobs.

But a new study out of Amherst Securities indicates that negative equity is by far the best default predictor of defaults. If that view is correct, the fact that we are still producing mortgages that quickly slip into negative equity should be terrifying. And, in fact, much of the recovery in the housing market appears to be built on thinly capitalised mortgages subsidized by low loan-to-value FHA guaranteed mortgages and the home-buyer tax credit.

As the chart below shows, even home buyers who took out mortgages as late as this year are finding themselves with negative equity at historically high rates. We’ve come down from the worst levels of the housing boom but we are still well above healthy levels.

In short, we may be witnessing a policy mistake of stunning proportions as lawmakers and regulators focus on job creation while ignoring the still problematic loan-to-value ratios in the housing market.

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