The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach & Education function engages, empowers and educates the public in the Second District. Our outreach mission furthers the Bank’s commitment to the region by listening to the communities we serve and developing programs, analysis and sponsored conferences and clinics to help meet their needs. Our education mission aims to advance public knowledge about the Federal Reserve System and its role in the economy.
The 2004-06 boom in nonprime mortgage lending in the United States was quickly followed by a spike in the rate of delinquencies and defaults on these loans.
Evidence from the current downturn suggests that declines in house prices—or, more precisely, reductions in borrower equity—are key contributors to delinquencies and defaults.
To better understand and respond to the foreclosure crisis, policymakers are turning to measures of negative equity, in which the value of a property is below the property's mortgage balance.
Haughwout and Okah estimate negative equity in the U.S. nonprime mortgage market for 2008-09 to describe the sources of the problem and the characteristics of borrowers “below the line.” They combine information from house price indexes with data on individual loans to gauge the prevalence and magnitude of negative equity across various dimensions, including the location of the property and the year in which the mortgage originated.
The study finds that nonprime borrowers in negative equity share several characteristics: for example, they took out loans near the peak of the housing market and their mortgages had high loan-to-value ratios usually achieved with subordinate liens.
In addition, borrowers in negative equity are twice as likely as those in positive equity to be seriously delinquent, or in default, on their first-lien mortgage.
Haughwout and Okah also show that while negative equity loans exist in most U.S. metro areas, they are disproportionately concentrated in housing markets that experienced especially large swings in house price appreciation, particularly in California.
The authors’ results also suggest that if house prices fall an additional 10 percent from December 2008 levels, about 1.5 million new mortgages nationwide will be in negative equity; the aggregate difference between these balances and house values could reach $135 billion.
About the Authors
Andrew F. Haughwout is an assistant vice president and Ebiere Okah an assistant economist at the Federal Reserve Bank of New York.
The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.