Renters, Actually
Economists at the Federal Reserve Bank of New York are counting underwater borrowers as renters rather than homeowners, to calculate future homeownership rates.
Unless house prices increase substantially in the next few years, many homeowners with negative equity will default and exit their homes, become renters and homeownership rates will drop substantially, according to economists Andrew Haughwout, Richard Peach and Joseph Tracy at the
The national homeownership rate fell to 67.2% in the fourth quarter from a high of 69% in 2006, but is likely to drop even further in the next few years to levels last seen in the 1990s, they said.
The economists contend that there is a significant "homeownership gap" that could be as high as 5.6% nationally between the official homeownership rate and what they call the "effective" rate, which excludes underwater borrowers.
More troubling are the public policy implications of lower homeownership rates.
Without the financial incentive of equity that encourages people to take care of their homes,
"The predominance of 'nonhomeowners' in these metropolitan areas could lead to a decline in citizen participation in local affairs, with a concomitant loss of vigilance over the quality and efficiency of public services and institutions," they wrote.
The economists also paint a grim picture for underwater borrowers. While loan modifications could help those who are financially strapped, only mods that reduce principal will give them enough breathing room to remain in their homes. "It is unlikely that many negative equity mortgage holders will be able to sustain the high rate of saving needed to remain a homeowner," they said.
Purchase Falloff
Home purchase applications are now 35% lower than they were a month ago, further proof that
Refinance applications also dropped this past week for the first time in a month.
Despite exceptionally low interest rates, many homeowners have already refinanced, are underwater on their mortgages, have uncertain job situations or have damaged credit, said Michael Fratantoni, the MBA's vice president of research and economics. As a result,
The average interest rates for a 30-year fixed mortgage fell 2 basis points to 4.81% from a week earlier. The trade group's index of home purchase loans fell 5.7% from the previous week on a seasonally adjusted basis, but dropped 16.3% on an unadjusted basis. The index of refi requests fell 14.3% from the previous week and was 30.4% lower than the same period over Memorial Day a year earlier.
Amherst on Mods
Borrowers with loans in private-label securities are redefaulting at the same high rates as those held by the government-sponsored enterprises Fannie Mae and Freddie Mac.
Redefault rates on 1.2 million first-lien single-family mortgages are running above 50%, according to an
Despite attempts to stem the tide of foreclosures with the administration's Home Affordable Modification Program, which Dobson called "a payment-based experiment on over 1 million loans," redefault rates are expected to spike in the coming months.
"As we predicted, it [Hamp] did not work," Dobson wrote. "If we want families to escape foreclosure, a real solution to the second-lien issue must be implemented. Otherwise the Hamp program has only had the effect of loss deferral and exacerbation rather than a more responsible goal of foreclosure avoidance and loss minimization."
Some industry experts suggest that because it takes so long for many states to work through the backlog of foreclosures, borrowers are choosing to delay the foreclosure process by redefaulting after getting a loan mod.
Quotable …
"It all depends on your belief system. If you think we're in the late innings, then everyone has time. But if you believe we're in the early or middle innings and there are more defaults coming and foreclosures haven't peaked and there may be a double-dip, then there's no rationalization for why banks and servicers wouldn't be aggressively pushing these properties out the door."
