Price Declines Take a Bigger Piece of Prime Borrowers' Equity

The analysts at Fitch Ratings warn that before the housing market pulls out of this downturn, half of prime borrowers could find themselves underwater on their mortgage. Data released last month by CoreLogic shows that one in five of all residential mortgages in the U.S. is in a negative equity position. But segment out just those homeowners with prime mortgages, and Fitch says one in three currently owe more on their mortgage than the home is worth. Fitch took into account all prime borrowers in private-label residential mortgage-backed securities (RMBS). “The sputtering U.S. housing market will result in more prime borrowers being pushed further underwater on their mortgages,” Fitch said in a report released this week. Despite some recent modest gains, home prices have further to fall before any sustained recovery takes hold, according to Grant Bailey, a managing director at Fitch. “With home prices likely to decline another 10 percent, roughly half of prime borrowers will wind up underwater on their mortgage,” said Bailey. Looking at the entire mortgage borrower population, the analysts at Deloitte cite data from JPMorgan Chase which indicates that a further drop in housing prices of 5-10 percent – as expected by the end of 2011 – would increase the number of properties with negative equity to 15-20 million. CoreLogic’s latest assessment put the number of underwater borrowers at 10.9 million at the end of the second quarter of this year. On top of the unsettling negative equity positions of prime borrowers, Fitch’s study also revealed that over 12 percent of all prime borrowers are seriously delinquent on their mortgages. “Prime mortgage default rates will stay elevated as home prices fall further and unemployment remains high,” according to Bailey. Fitch has cited borrower equity as the pre-eminent driver of mortgage default performance in its new rating model. The combination of declining equity, rising delinquencies, the growing risk of payment shock, and the application of Fitch’s updated criteria led to further negative rating actions on prime RMBS transactions in the agency’s latest ratings review. Forty-two percent of prime RMBS ratings, primarily those already rated ‘B’ or below, were downgraded further by Fitch