A new analysis from credit rating company Fitch Ratings revealed that a third of prime borrowers are currently underwater on their mortgages.
And after everything is said and done, the company expects roughly half of prime borrowers, those at the higher end of the credit score range, to end up in a negative equity position thanks to a further 10 percent decline in home prices.
You may think it doesn’t matter much, given these are the crème de la crème of homeowners with mortgages.
But Fitch also noted that over 12 percent of prime borrowers are already seriously delinquent on their mortgages, aka on the road to foreclosure.
And who knows how many are at least 30 days behind on mortgage payments or about to be soon.
Fitch also happens to hold the belief that a borrower’s home equity is the “pre-eminent driver of mortgage default performance.”
So it doesn’t necessarily matter if the homeowner has an 800 credit score and the ability to pay the mortgage each month.
If they don’t have any home equity, there’s a good chance they’ll give up and walk away from their home.
Lower Mortgage Rates = More Walkaways?
It now averages a staggering 3.94 percent for a conforming loan amount, which aside from benefiting first-time home buyers, makes it less and less attractive to hold an underwater mortgage.
You see, those with negative equity can’t even do a rate and term refinance to take advantage of the low rates, so there’s more incentive for them to walk away the lower rates go.
From their perspective, the lower interest rates become, the more expensive their mortgage payments begin to look relative to what’s available, and the easier it will be to buy and bail. That is, qualify for a mortgage on another like property, move, and then ditch the old house (and mortgage).
This wasn’t how it was supposed to go down, quite the contrary really.
The Fed figured pushing interest rates lower would buoy home prices, thereby keeping existing homeowners in place despite their dismal equity positions.
But it seems to me that it’s just creating more temptation to walk, especially if those who need it most can’t take advantage of the low rates available.
Super Massive Mortgage Refinance Program
Okay, I’m just making up names here.
But this scenario creates a perfect argument for extending a massive refinance plan to all borrowers.
And with elections just around the corner, it’d be a great shot in the arm (for a Presidential campaign) to offer such a program to all the struggling homeowners out there.
After all, the record low mortgage rates are only helping those who never got into this housing mess to begin with, or the mega-rich (or mega-conservative) who have enough equity to take advantage of them.
For a housing recovery to work, both existing and prospective homeowners must benefit.