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16 OVERLEVERAGED? While some economists are starting to predict another housing crisis, debating when and how it will happen, the New York Fed seeks to answer the question, "Are we prepared for another housing crisis—or even just a slump in home prices?" e answer, according to the New York Fed: "e household sector is still vulnerable to severe house-price declines, although it has become steadily less risky in recent years." is is the opinion of New York Fed researchers Andreas Fuster, Benedict Guttman- Kenney, and Andrew Haughwout in their report "Tracking and Stress-Testing U.S. Household Leverage." e researchers tracked household leverage, the ratio of housing debt to home values, noting that there is a "strong correlation between a borrower's leverage and their propensity to become seriously delinquent." In fact, the researchers asserted, "High household debt is widely considered one of the main causes of the Great Recession and the slow recovery that followed." As of the first quarter of 2017, 3 percent of borrowers were underwater, and 78 percent had a combined loan-to-value (LTV) ratio lower than 80 percent. (e combined LTV rate takes second liens into account in addition to first mortgage loans.) If national home prices slip to their levels of just two years ago, the underwater ratio rises to 9 percent. If prices fall to their level recorded four years ago, the tide rises, resulting in a 21 percent negative equity rate. In a more dramatic stress test, the New York Fed predicted a 38 percent negative equity rate in the case of a "peak-to-trough house price drop" mimicking that of the Great Recession. At this point, just 38 percent of homeowners would have a combined LTV rate below 80. "Unsurprisingly, this outcome would be worse than at the height of the bust, since, in many areas of the country, house prices have not yet recovered to the same peaks from which they previously fell," the New York Fed study stated. e "sand states" that fared poorly during the last housing crisis would again flounder. e rate of underwater homeowners in Nevada would be near 50 percent. In Florida, the rate would be 35 percent; in Arizona, 31 percent; and in California, 23 percent. e New York Fed conducted similar stress tests to determine the serious delinquency rates in cases of pricing downturns. Were house prices to remain steady, the researchers predicted a 4.2 percent serious delinquency rate over the following 24 months, starting with the first quarter of 2017. If housing prices drop to their levels of two years ago, that rate would rise by just one percentage point. If prices fall to levels of four years ago, the serious delinquency rate would be 67 percent above the base, reaching 7.0 percent. In a crisis "peak-to-trough" scenario, serious delinquencies would rise to a substantial 9.9 percent of all outstanding mortgages. Again, the most severe rates would be seen in the "sand states." e New York Fed also compared leveraging among types of loans, saying, "Unsurprisingly, since the GSE and portfolio loans are the least levered, they have the lowest projected delinquency rates across scenarios." In fact, projected serious delinquency rates in a crisis similar to the last would be twice as high for government loans as for GSE and portfolio loans. e New York Fed conducted its stress tests at the county level to reveal the varying impacts on different markets. As can be expected, "e scenario proves to be especially harsh for regions where house prices have not recovered from their troughs." "Unsurprisingly, this outcome would be worse than at the height of the bust, since, in many areas of the country, house prices have not yet recovered to the same peaks from which they previously fell." —NY Fed study