$89 billion: The principal reduction price tag to save American homeowners

Black Knight quantifies principal reduction

After the Senate Banking Committee’s recent discussion on possible principal write-downs for delinquent underwater borrowers, Black Knight’s latest Mortgage Monitor Report found that if any solutions go through, delinquent underwater borrowers would require up to $89 billion in write-downs.

There are currently approximately four million borrowers in negative equity positions, representing nearly $800 billion in outstanding balances, with $157 billion of that being underwater.

“Over the past two-and-a-half years, there has been sustained and continual improvement in the number of underwater borrowers in this country,” said Trey Barnes, Black Knight’s senior vice president of loan data products. “From 33.5% of borrowers being in negative equity positions in January 2012, we’re now looking at less than 8% of borrowers underwater. However, there are still four million borrowers who owe more on their mortgages than their homes are worth, despite more than two years of relatively steady home price appreciation.”

As a result, Barnes explained that this leaves a great deal of debate around the issue of principal reductions for these delinquent borrowers.

Currently, there is an aggregate 40% delinquency rate among borrowers with current combined loan-to-value ratios above 100%.  

To put this into perceptive, for the 365,000 delinquent underwater loans backed by Fannie Mae and Freddie Mac alone, it would require nearly $18 billion in write-downs.

Meanwhile, on the solution side, the Federal Reserve Bank of Philadelphia just released a white paper on the using a mortgage strip-down to reduce the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 7 or Chapter 13 bankruptcy. 

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