A new analysis from credit rating company Fitch Ratings revealed that a third of prime borrowers are currently underwater on their mortgages.And after everything is said and done, the company expects roughly half of prime borrowers, those at the tippity-top of the credit score range, to end up in a negative equity position thanks to a further 10% decline in home prices.
You may think it doesn’t matter much, given these are the crème de la crème of homeowners with mortgages.
But Fitch noted that over 12% of prime borrowers are already seriously delinquent on their mortgages, aka on the road to foreclosure.
And who knows how many are at least 30 days behind on mortgage payments or about to be.
Fitch also happens to hold the belief that borrower equity is the “pre-eminent driver of mortgage default performance.”
So it doesn’t matter if the homeowner has an 800 credit score and the ability to pay the mortgage.
If they don’t have any home equity, there’s a good chance they’ll give up and walk.
Lower Mortgage Rates = More Walkaways?
Today, Freddie Mac announced that mortgage rates on the popular 30-year fixed-rate mortgage slipped below 4% for the first time in history.
It now averages 3.94% for a conforming loan amount, which aside from benefiting first-time homebuyers, makes it less and less attractive to hold an underwater mortgage.
You see, those with negative equity can’t refinance to take advantage of the low rates, so there’s more incentive for them to walk away the lower rates go.
From their perspective, the lower interest rates become, the more expensive their mortgage payments begin to look, and the easier it will be to buy and bail. That is, qualify for another like property, move, and then ditch the old house (and mortgage).
This wasn’t how it was supposed to go down, quite the contrary really.
The Fed figured pushing interest rates lower would buoy home prices, thereby keeping existing homeowners in place.
But it seems to me that it’s just creating more temptation to walk, especially if those who need it most can’t take advantage of the low rates on offer.
Super Massive Refinance Program
OK, I’m just making up names here.
But this scenario creates a perfect argument for extending a massive refinance plan to all borrowers.
Even those so deeply underwater that they can’t qualify for existing negative equity programs (HARP) that go to 125% loan-to-value.
And with elections just around the corner, it’d be a great shot in the arm (for a Presidential campaign) to offer such a program to all the struggling homeowners out there.
After all, the record low mortgage rates are only helping those who never got into housing to begin with, or the mega-rich (or mega-conservative) that have enough equity to take advantage.
For a recovery to work, both existing and prospective homeowners must benefit.