With a majority of borrowers in U.S. residential mortgage backed securities (RMBS) transactions owing more on their mortgages than their homes are currently worth, negative home equity is preventing sustained improvement in U.S. mortgage performance, according to the new monthly report from Fitch Ratings released today
Fitch estimates that approximately 60 percent of the borrowers whose mortgages were securitized in 2006 to 2007 and are still performing are in a negative home equity position, or ‘underwater’.
According to Fitch’s Senior Director Grant Bailey, “Negative equity reduces a borrower’s incentive to pay their mortgage and limits their options when faced with financial difficulties.”
After notable improvement through the first half of this year, the percentage of previously performing borrowers rolling into a delinquency status stabilized at an elevated level through the summer months and increased modestly in the month of September.
The rise in unemployment, which has reached 9.8 percent nationally and a record level of 12.2 percent in California, where the greatest percentage of RMBS borrowers is located. Fitch projects U.S. unemployment will continue to rise and peak at 10.3 percent in the middle of 2010.
Fitch projects over the next year a further home price decline of approximately 10 percent nationally, when weighted by outstanding mortgages. Home price figures in recent months were temporarily helped by the reduced share of distressed property liquidations due to foreclosure moratoriums and servicers’ increased efforts to qualify borrowers for modifications. However, the number of distressed borrowers has continued to grow.
The number of non-agency borrowers at least three payments behind on their mortgage reached 1.66 million in September, the highest level on record.
“While increased modification efforts and an extension of the first-time home buyer tax credit may help home prices, the ultimate increase in liquidations from the growing distressed inventory will likely cause a further price decline,’ said Bailey.