CoreLogic: Equity Growth Among Homeowners May Provide Significant Foreclosure Barrier
Two companies have issued reports on the strong gains
in homeowner equity. Not only is this an indication of building household
wealth and the ability of the housing market to withstand some of the economic
damage of the pandemic according to ATTOM Data Systems in its first quarter U.S
Home Equity and Underwater Report, but the CoreLogic, in a blog entry, says the
equity could help prevent widespread mortgage
defaults and foreclosures as government pandemic support fades.
ATTOM reports that 17.8 million U.S. homes were, in its words, “equity rich”
in Q1. That is, the combined loan-to-value ratio (CLTV) of their mortgages was
50 percent or less. The 17.8 million homes represent 31.9 percent or one out of
every three of the 55.8 million mortgaged homes in the U.S. This up from 30.2
percent in the fourth quarter of 2020, and 26.5 percent in the first quarter of
The report also shows that just 2.6 million, or one in 21, mortgaged homes
in the first quarter were considered seriously underwater, with a CLTV at least
25 percent more than the property’s estimated market value. That figure
represented 4.7 percent of all U.S. properties with a mortgage, down from 5.4
percent in the prior quarter, and 6.6 percent a year earlier.
Among the 50 states, 41 showed an increase from the fourth quarter of 2020
to the first quarter of 2021 in the percentage of homes considered equity-rich,
while 49 saw a decrease in the percentage that were seriously underwater. The gains
came as median home prices nationwide rose 16 percent, year over year, in the
first quarter of 2021 and were up at least 10 percent in most of the country.
“It continues to be a great time to be a homeowner most everywhere in the
country. The ongoing price spikes we’re seeing help to cut down the number of
seriously underwater properties and boost the level of equity-rich properties,”
said Todd Teta, chief product officer with ATTOM Data Solutions. “However, that
may shift once the foreclosure moratorium is lifted and that’s something we’re
watching, partly because it could limit equity gains and draw people
underwater. For now, though, the equity picture remains one of many signs that
the long U.S. housing market boom keeps charging ahead.”
CoreLogic analysts Selma Hepp and
Yanling Mayer say the pandemic and its devastating impact on the job market has
left many households unable to pay their mortgages or rents, but the speedy passage
of the CARES Act ensured mortgage forbearance options for them. While this helped
many distressed homeowners keep their homes, a rebound in job growth and
economic activity will determine the final outcome for many of them.
The availability of home equity is
also important for homeowners who may be unable to make mortgage payments. Positive
equity gives them the option to sell their home rather than face a foreclosure
or a short sale.
There was an initial spike in early
delinquencies, which peaked at 4.2 percent in April 2020 but are now lower than
prior to the pandemic – 1.5 percent in February 2021. Serious delinquencies (90
or more days past due) have also been declining since their August peak, also
at 4.2 percent peak, and had fallen to 3.7 percent by February. New
delinquencies are also lower than they were prior to the pandemic. There are
still more than 2 million borrowers in forbearance, however, and nearly half of
them are at least 180 days past due in their payments.
A typical homeowner in forbearance
appears to have sizeable equity in their home, with median equity just over
$100,000 and loan to value ratio at about 61 percent. Homeowners who bought
their homes prior to 2012 represent about 42 percent of those in forbearance
with an estimated equity excluding the missed mortgages near $100,000. Forty-three
percent of forborne homeowners purchased between 2013 and 2018 and typically
have more than $87,000 in equity after accounting for missed payments. Even the
newest owners – those who purchased their home in 2019 or later and represent
15 percent of those in forbearance – have notable equity gains averaging over
$65,000 for a typical borrower. Generally, a typical homeowner in forbearance could
cover the costs of selling a home and still have some equity left over.
Of course, the original down payment
amount makes a difference in equity accumulation. Homebuyers who purchased
their homes with FHA or VA loans, which require lower down payments, take
longer to acquire sufficient equity to provide a financial buffer in times of
CoreLogic looked at the distribution of equity within each of the categories in Figure 2 and summarizes, in Figure 3, the available equity for those in the fifth, 25th, and 75th percentile of the equity distribution. The borrowers in the lowest equity group, the fifth percentile, are most vulnerable to losing their homes since they have the least accumulated equity. For FHA/VA borrowers, home equity in the lowest percentile ranges between about $3,000 to about $19,000, while for GSE borrowers, equity in the lowest percentile is between $13,000 and $23,000.
The authors note that those with
longest current ownership, and in the lowest percentile, have less equity than
newer owners. These are likely borrowers who purchased at the peak of home
price growth before the Great Recession and have yet to gain equity. CoreLogic,
using a different definition of negative equity, puts the number of underwater homeowners
at 1.5 million (2.8 percent). Among borrowers in forbearance, 2.9 percent are
still in negative equity, about 58,000 loans.
Even borrowers with the least amount
of equity would still have about $3,000 left after paying off the missed
payments while those in the 25th or higher range of the distribution would have
notable financial buffers. Lastly, when the costs of selling a home – which are
approximated at about 10 percent of the home price – are taken into
consideration, a separate CoreLogic analysis showed that 4 percent of
borrowers with a mortgage nationally have less than 10 percent in home equity.
While the COVID-19 pandemic has
wreaked havoc on many lives, the housing market conditions which followed drove
acceleration in home prices and ensured existing homeowners a notable boost in
their home equity; an average increase of $26,000 in 2020 and a total average
equity of over $200,000 at the end of last year.
The authors conclude that the
accumulation of equity is critically important as homeowners decide on their
post-forbearance options. “Still, as our analysis has shown, most homeowners in
forbearance will be able to tap into their equity and sell their home rather
than lose it through a foreclosure. In the end, the wave of foreclosures
resembling that of the 2008-2013 period seem to be an unlikely outcome of the
COVID-19 pandemic recession” they say.