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 balances.
Even 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.
Even 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.
There 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.
Focusing 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 $30,000.
Of 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 score.
Returning 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.
Looking 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.
The 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.