In its current edition of its monthly Mortgage Monitor report Black Knight
Financial services takes a new look at data on underwater delinquent borrowers. The company said this was prompted by a
recent Senate Banking Committee hearing that looked at the possibility of
writing down mortgage principal balances to assist those borrowers. Trey Barnes, Black Knights senior vice president of Loan Data Products, estimated some
4 million borrowers are underwater, that is owe more on their mortgages than
the market value of their homes, and have nearly $800 billion in outstanding
in an environment of rising prices, these negative equity borrowers are ten
times more likely to fall into delinquency than those with positive
equity. There is a 40 percent aggregate
delinquency rate among borrowers with current combined loan-to-value (CLTV)
rations above 100 percent compared to 4.0 percent delinquencies for positive
equity loans. Three out of four severely
underwater borrowers, those with a CLTV of 150 percent or more, are delinquent.
where there is a small amount of equity delinquencies are higher. Black Knight notes in another section of the Monitor dealing with risk that borrowers
with LTVs of 90 percent or higher are almost six times as likely to be in default
18 months after origination than those with 20 percent or more equity.
has been a continued improvement over the last two and a half years, as home
prices have risen, in negative equity numbers.
One third of mortgaged homeowners were underwater in January of 2012, a
number that has now declined to 8 percent.
Only 1.2 percent of active mortgages are currently considered severely
underwater, down from 9.5 percent at the beginning of 2012 when the home prices
bottomed out. But as the numbers of those borrowers who are in negative
territory has fallen, the risk for the remaining ones has increased.
on those mortgages backed by Fannie Mae and Freddie Mac (the GSEs), which would
be those most likely to be targeted by any government write down, Black Knight
finds that approximately 1.3 million of them are underwater (27 million have
positive equity) with an aggregate unpaid balance of $39 billion. The average borrower is underwater by
the GSE-backed underwater loans, 365,000 of them are delinquent. These loans represent $67 billion in unpaid principal
balance and have an aggregate negative equity of $18 billion, an average of
$49,000 per loan. There is a strong
correlation among the GSE loans between CLTV and delinquency rates with those
loans considered severely underwater (150+ CLTV) running a 74 percent rate
compared to 13 percent delinquencies among those with CLTVs of 101-110 percent.
“There is understandably a
great deal of debate around the issue of principal reductions for these
delinquent borrowers,” Barnes said. “With an aggregate 40 percent delinquency
rate among borrowers with current combined loan-to-value 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. Some $89 billion in principal
reductions would be required to right-side these borrowers. For the 365,000
delinquent underwater loans backed by Fannie Mae and Freddie Mac alone, nearly
$18 billion in write-downs would be called for.”
The Monitor also looked at the appetite for risk in mortgage
lending. While Black Knight finds there
has been some easing of credit requirements for refinancing, credit
requirements are still historically high.
Weighted average credit scores for
GSE refinances have come down to 742 from a high of 766 in late 2011. Credit
requirements on GSE purchase mortgages, on the other hand, have remained tight,
with average credit scores remaining relatively steady since 2009 and currently
at 757. Looking at GNMA-backed originations — historically serving borrowers
with lower credit profiles — Black Knight again sees some relaxation in
refinance credit requirements, with a weighted average credit score of 701.
This is markedly higher, though, than the pre-crisis average of 628 in 2005.
Likewise, credit scores on GNMA purchase loans are now an average of 703, up
sharply from 2005’s 660 average.
Looking at it from a different
direction, among persons refinancing in 2014 55 percent had credit scores above
740 compared to only 29 percent in 2005 and only 8 percent had scores below
640, one third the number in nine years ago.
Among home purchase originations 56 percent went to those with the
higher scores while only 2 percent of originations were for borrowers with scores
under 640. Black Knight says, “Low
credit borrowers have been essentially absent in recent vintages.” At the same time, borrowers with pristine credit
capitalized on refinances in the low interest rate environment.
While early stage delinquencies in
recent vintage loans (2012-2013) are lower for all credit score groups than in
the troubled 2005-2006 vintage of loans which drove much of the foreclosure
crisis, there is still a clear difference in performance when viewed by credit
to the risk of high LTV loans, Black Knight says that while lower than among
the earlier vintage of loans, those recent loans with LTVs above 90 percent are
still almost six times as likely to be in default 18 months after origination
than those with LTV’s of 80 percent or less.
briefly at other data in the Monitor for October, prepayments rose slightly to
just under 1 percent, the single month mortality or SMMM rate. This represents the percentage of total
outstanding principal in a pool of loans that is prepaid in a given month. This increase in prepayments occurred as
mortgage rates declined during the month.
share of mortgage originations attributed to refinancing increased from 31
percent in September to 42 percent in October.
In addition to the decrease in interest rates, Black Knight said the
percentage of refinances generally increases in the fall and winter as home
purchases historically decline.