![]() To estimate these transitions, we use default rates from the 2007-10 period for each CLTV and FICO score combination, as described in Chart 12 of this paper. More specifically, the maps show the 24-month transition rates for loans that were current (and not in forbearance) as of December 2020. ![]() In the maps below, we show expected mortgage default rates under the two scenarios. Yet the favorable credit score distribution would ameliorate the effects of these price declines on mortgage defaults. Because of strong price growth since 2016, we estimate that Idaho, Utah, Nevada, and Arizona would all experience negative equity rates of more than 30 percent under HPI-4. What can we say about how mortgage performance would evolve under these scenarios? To start with, the price declines would drive many borrowers into negative equity, putting them at risk of default. Note that our data set is limited to mortgage borrowers and thus excludes all properties owned “free and clear” (with no mortgage). The next chart shows the updated distribution of CLTV across current mortgage borrowers through December 2020. A property’s CLTV is the value of all debt secured by the property, divided by the value of the property, and is thus equal to 100 percent minus the owner’s equity as a share of the property value. We begin by providing an updated Combined Loan to Value (CLTV) ratio for a large sample of mortgaged properties in the United States, using sale or appraised values at mortgage origination and estimating price appreciation using the CoreLogic Home Price Index. To examine this, we use the method developed in this Economic Policy Review article to assess current risks in the housing market at the property level. Of course this is an aggregate figure, and the distribution of leverage is a more important indicator of risks in the housing market. Additional borrowing was large enough to keep the owner’s share roughly constant at about 61 percent. (This is the value of the property minus the debt owed on it, expressed as a share of the property value.) Note that during the previous housing boom (1995-2006) this measure didn’t rise, in spite of sharply rising home prices. Additionally, the owner’s share of housing wealth is 67 percent as of the first quarter of 2021, its highest value since 1989. The former, however, has outpaced the latter in recent months. ![]() Because prices had risen and fallen so fast, new mortgage originations in the period leading up to the peak, including those with substantial down payments, were quickly put into negative equity, which is a major risk factor for foreclosure, as both academic research and the experience of 2007-11 demonstrate.Īre developments in the housing market now essentially the same? Well prices have certainly been rising very fast, and mortgage originations have also been strong. By 2012 the average home had lost about a quarter of its 2006 value. Prices then fell 20 percent between mid-2006 and early 2009. Our last post demonstrated that price increases have been unusually strong and are now at rates not seen since just prior to their peak in 2005 at 16 percent year-over-year. ![]()
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