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Positive Equity Won't Return For Most Underwater Borrowers Until 2015

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First American CoreLogic estimates that the typical US homeowner who is in negative equity will not experience positive equity until late 2015 to early 2016. In severely depressed markets, the typical borrower in negative equity may not experience positive equity until 2020 or later. CoreLogic projects more than 11.3m — or 24% — of all residential properties with mortgages had negative equity at the end of the Q409. While the largest decreases in home prices appear to have already happened, it remains to be seen when borrowers will return to positive equity. To predict how much long borrowers will remain in negative equity, CoreLogic projected future home values and unpaid principal balances for a selected set of Core Based Statistical Areas (CBSAs) to gauge how long it will take for the average underwater borrower to return to positive equity. The chart above projects the amount of negative equity using CoreLogic short-term forecasts and a baseline view of long-term price trends nationally through 2020. It also takes into account the amortization assumptions described below for ten markets. According to the projections, it will take the typical borrower until late 2015 or early 2016 for negative equity to disappear. But in severely depressed markets, like Detroit, negative equity won’t dissipate even by 2020, because of its depressed economy. Negative equity is widely considered a trigger to strategic default, and a Treasury Department program announced Friday attempts to address the problem by pushing lenders and servicers to offer borrowers principal reductions on their mortgages. And although house price appreciation will, over time, offset negative equity, amortization — the paying down of loan balances — will in most cases be a more significant remedy to negative equity, a research note from CoreLogic economists states. Over the next 10 years, the average loan balance will decrease by an annual rate of 3.3%; meanwhile home price are expected to increase at a 3% annual rate over the next decade, they claim. Of the ten markets CoreLogic studied, the Washington-Arlington-Alexandria CBSA is expected to reach positive equity by 2015; Atlanta-Sandy Springs-Marietta, Dallas-Plano-Irving and Riverside-San Bernardino-Ontario are projected for 2016; Boston-Quincy by 2017; and Cape Coral-Fort Myers, Pittsburgh, Las Vegas-Paradise and Lancaster, PA by 2020. It is estimated that Detroit will not reach positive equity until after 2020. The projections are based on a 3% annual home price appreciation. An alternative scenario of 5% annual price appreciation would put the first markets recovering by 2013, but CoreLogic said 5% appreciation would be much higher than historical appreciation, especially given today's low inflation environment. Conversely, a 1.5% annual appreciation, which would be fairly low relative to history, would push back the point of positive equity to at least 2017. Write to Austin Kilgore.

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