The Federal Reserve Bank of New York today released Below the Line: Estimates of Negative Equity among Nonprime Mortgage Borrowers, a new forthcoming article in the Bank’s Economic Policy Review series.
Authors Andrew F. Haughwout and Ebiere Okah estimate negative equity—in which the mortgage balance exceeds the value of the collateral housing unit—in the U.S. nonprime mortgage market as of December 2008 to describe the source of the current delinquency and foreclosure problem. They discuss the causes of negative equity—smaller down-payments and falling home prices—along with the effect on current and future delinquency rates.
The combination of rising loan-to-value ratios at mortgage origination and falling housing prices in recent years has led to substantial growth in negative homeowner equity, the authors explain. Analysis of the seventeen major cities covered by the S&P/Case-Shiller tiered house price indexes showed a concentration of negative equity properties in areas that experienced large declines in housing prices and had more recent loans. Negative equity borrowers often achieved high loan-to-value ratios with subordinate liens in addition to their first lien and had higher than average debt-to-income ratios. Haughwout and Okah estimate that by December 2008, nearly half of all nonprime borrowers in these seventeen cities had negative equity in their homes.
Measures of negative equity have become a key component in crafting policies to address the foreclosure crisis, as these borrowers are twice as likely to be seriously delinquent or in default on their first-lien mortgage compared with positive equity borrowers. The authors note the importance of housing prices going forward, as a relatively small change could have a large influence on the incidence of negative equity.Andrew F. Haughwout is an assistant vice president and Ebiere Okah is an assistant economist at the Federal Reserve Bank of New York.