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November 29th, 2009 (Modified on July 29th, 2010)

Home Equity: Why 2015 is the New Zero



Lew Sichelman wrote an excellent piece for the trade publication National Mortgage News citing a fresh study which explored the likelihood that an underwater borrower would walk away from their home, even if they could afford to make payments.

The article noted that “fewer than one in 1,000” borrowers would mail in the keys with just a 10% deficit, only 5% would walk away with a gap of 10% to 20% and only 17% would go voluntarily without selling if they were 50% underwater. Lew’s take is that ‘strategic defaults’ are “well-reported, if not well documented.” We agree; the number of homeowners defaulting by choice is probably quite small relative to the problem as a whole.

But what about those who stay? What happens to them?

Given that a sizable chunk of the population is perhaps 10% to 20% underwater, we thought we’d run a few quick calculations to see what the 95% of borrowers who stay put might face in their financial futures.

We needed to make a few assumptions, of course. A borrower who bought a $200,000 home in January of 2006 with a fully-amortizing, fixed-rate mortgage at 6% with a 5% down payment probably saw a little lift in prices for that year, overall, but the softening of home prices was already getting underway by late in the year.

However, for the sake of argument, we’ve ascribed a 10% annualized decline in value from Jan 2006 through October 2008, then a 5% annualized rate though November of 2009 (we realize the declines have been nowhere as even or regular as these but the effect should be roughly the same). Doing so put our borrower at a loan-to-value ratio of almost 127% this month, deeply underwater and certainly at a level where one might consider walking away.

We can’t say for sure what will happen with prices in the future, but since there have been some signs of leveling off, we assume that the next seven months (through June 2010) will feature a 0% rate of increase or decrease, followed by a 14-month period of 2% annual price increases, then a 12-month period of 2.5% gains before finally settling in to a flat 3% annual increase going forward.

Period Assumption
Jan 2006 – Oct 2008
Nov 2008 – Nov 2009
Dec 2009 – June 2010
July 2010 – Aug 2011
Sept 2011 – May 2015
June 2015 – July 2016
Aug 2016 – July 2022

Following this pattern, a borrower would finally come back to a 100% LTV level in May 2015. That is, they are back to a 0% equity level, where the value of their home is equaled by the amount they still owe on their mortgage… better than 10 years into making payments. Worse, even though they are finally at 0% ownership, the value of the home is almost $39,000 below their starting point.

Hoping to refinance? It’ll be a while. Although FHA loans require only 3.5% equity in the property (and assuming they still will and that rates are favorable at that time), a chance to do so will come along in about November of 2015. Remember, you’re also building equity by retiring some of your loan balance, too; you can find out where your loan will be at different points in time by utilizing an amortization calculator.

Want to sell without needing to pony up cash out-of-pocket? At a continuing 3% appreciation clip, it will take you another 13 months of making regular payments to cover the typical 6% commission, but at least you’ll get out without paying…but you’ll still be about $33,000 in the hole since the home would only be worth about $167,000 by then.

Figure you’ll hold on until you get back to the original $200,000 value? Better plan for the long haul. If we continue the 3% run of annualized appreciation, you’ll get back to the home’s original $200,000 value in July of 2022, some seventeen-plus years after you bought it.

Of course, these may or may not be realistic assumptions. Home values may move upward more strongly or more weakly which of course would change the time frames somewhat, either shorting or lengthening them as appropriate. Mortgage products which delay the payment of principal will of course affect the recovery time, too.

No wonder loan mods are popular. Given the deep hole many borrowers are in and the long, long recovery of value and equity ahead, is it any wonder that so many borrowers who are still in good straits are contacting their servicers for a loan mod? Mary Collin, Wells Fargo’s VP of Mortgage Servicing, noted in an October 2009 interview in the Servicing Management magazine that requests from homeowners still current on their mortgages but seeking modifications comprised about 40% of the calls they are receiving.

The “can’t sell without a loss” and “can’t refinance” problem is likely to be around for years. As we move into the future, expect mortgage servicers to place more emphasis on deed-in-lieu and short-sale programs. For the most part, homeowners who bought near (not even at) the peak of the market will continue to find mortgage troubles well into the future.

Are you one of the people in this situation? What does your scenario look like?

For More Please Read: “Climbing the ‘House-Value Mountain’‚ĶThink Everest”

5 Responses to “Home Equity: Why 2015 is the New Zero”

  1. tycoon cashflow Says: November 29th, 2009 at 5:25 pm

    Oh well, in the end it’s the taxpayer that is going to pay all these debts. Sad but true.

  2. Tim Manni Says: November 30th, 2009 at 12:01 pm

    Tycoon, You’re probably right. Thanks for the comment. -Tim

  3. s2kreno Says: February 1st, 2010 at 8:20 pm

    We are $200,000 (60%) underwater on a lot and the lender wasn’t working with us on a mod (it was investment ppty). The rate was 8% and after paying it for 5 years we could neither sell nor afford it. After threatening Ch 13 we got a 2% rate, $1400 lower payment). Even though it’s not a principal reduction it gave us a lower payment than we would have had at the 8% rate with a $150 k reduction. And when we can afford it we’ll throw the extra $ at it until it’s gone. Principal reductions seem impracticable because they are so unfair to those who don;t qualify for mods, can’t see that happening on a large scale.

  4. Tim Manni Says: February 2nd, 2010 at 11:30 am

    s2kreno, Thanks for commenting. When it comes to mods, it’s all about the lender weighing the costs — what’s going to work out best for them (financially). At least with a lower interest rate, the lender can still collect some interest. If they carve off a sizable chunk of your principal, that’s thousands the lender can no longer collect interest on. The lenders can still collect interest, and your lower rate makes it seem like you’ve got a principal reduction. If you were a lender would you agree to a principal reduction? Thanks for commenting, hope to hear from you again soon, Tim

  5. Compare Mortgages Says: February 19th, 2010 at 3:27 am

    We are $200,000 (60%) underwater on a lot and the lender wasn’t excavation with us on a mod (it was finance ppty). The judge was 8% and after stipendiary it for 5 life we could neither delude nor give it. After threatening Ch 13 we got a 2% evaluate, $1400 petty defrayal). Flatbottom tho’ it’s not a player reduction it gave us a lowly payment than we would hump had at the 8% rank with a $150 k reaction. And when we can afford it we’ll verbalize the superfluous $ at it until it’s exhausted. Corpus reductions seem unworkable because they are so dirty to those who don;t groom for mods, can’t see that event on a significant metric. =========== jonsmit

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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