Underwater mortgages cause defaults - not unemployment

According to the Congressional Oversight Committee (COP), unemployment is presently driving a fifth wave of foreclosures, but analysts at Amherst Securities say that negative equity is far more predictive of home loan defaults than unemployment. The question is critical, because the policy response depends on the answer: if coming defaults are caused by unemployment, then the relevant response would be to subsidize mortgage payments, says Laurie Goodman, head analyst on the team. On the other hand, if negative equity triggers defaults, then principal reduction must receive a higher priority.

Goodman presents two pieces of evidence to make her point. The first is a matter of timing: default transition rates picked up long before unemployment; and the second a matrix of transition rates.  The latter led to three conclusions:  One, even in the lowest unemployment column, high debt to asset ratios are associated with markedly higher default transition rates. Two, when borrowers have positive equity, unemployment plays a negligible role. Three, unemployment does impact borrowers with substantial negative equity, but far less than does high debt to asset ratios.  Carrying the analysis a step further, Amherst broke the data into owner-occupied and non-owner-occupied (investor and second home) categories. The same patterns emerged. Even for owner-occupied houses, unemployment only has a large impact where debt to asset ratios > 120%. For borrowers with very negative equity, unemployment is a catalyst that can kick defaults up, but it’s not a cause.

Obama programs hurting recovery, helping banks

Blackrock Inc. Chairman Laurence Fink claims that Obama administration programs to help homeowners stave off foreclosure may hinder the recovery of the mortgage market while benefiting banks that own second loans on the properties.  Fink said policies introduced this year to reduce foreclosures are flawed because they don’t require home-equity loans to be wiped out before the mortgage is modified.  Instead, in a break with the intentions of contracts, he says the second loan’s terms may also be revised, spreading the financial loss among lenders.  Fink is the highest-profile investor to call attention to potential conflicts when banks that service mortgages handle loan modifications.  One concern is that many servicers, which handle billing and collection for mortgage owners, also hold home-equity loans that would lose all value in a foreclosure.  JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co and Citigroup Inc, the four largest servicers, own almost $450 billion
of home-equity loans, according to Laurie Goodman, an analyst at Amherst Securities Group in New York.