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AS BORROWERS EMERGE FROM UNDERWATER, CLOUD OF PROBLEM HELOCS RISES The percentage of homeowners who owe more on their mortgages than their homes are worth declined to less than 12 percent as of the third quarter of 2013, according to Lender Processing Services' (LPS) Mortgage Monitor report. While the increasing number of homeowners rising above water is good news for the market, LPS detects some tumultuous seas ahead as a cloud of problem home equity loans forms on the horizon. The negative equity rate at the beginning of 2013 was 19 percent, according to LPS. The company estimates it dropped to 11.6 percent by the end of October. LPS SVP Herb Blecher explained the company's methodology for calculating the negative equity rate. "As reports of estimated U.S. negative equity tend to vary widely, and to clarify our approach, we are applying a highly refined methodology to our calculations, accounting for not only the current combined loan amount of first and second liens using comprehensive loan and property data, but also the impact of distressed sale discounts on loans in serious delinquency and foreclosure," Blecher said. In its latest report, LPS also took a closer look 28 at what it says is a problem waiting in the wings. Close to half—about 48 percent—of today's outstanding home equity lines of credit (HELOCs) were originated between 2004 and 2006, and more than 75 percent were originated between 2004 and 2009. According to LPS, "the vast majority" of these loans are set to amortize over the next few years. Credit scores among borrowers with HELOCs originated since 2004 are declining, based on LPS' data. For example, the average credit score for a borrower with a HELOC originated in 2007 was 744 at the time of origination. Those same borrowers today have an average credit score of 724. This poses a threat to lenders who "are often on the hook for almost all of 2nd lien losses," LPS explained. The average unpaid principal balance on these loans varies from $50,000 for loans originated in 2004 to $70,000 for loans originated in 2006 and 2007, according to LPS. The company says "alarm bells shouldn't be going off just yet," but LPS reasons, "if these trends continue—the next few years could present significant risk for defaults in the home equity market." NAR Chief Economist Reveals 2014 Predictions Speaking at the 2013 Realtors Conference & Expo, National Association of Realtors (NAR) chief economist Lawrence Yun predicted steadiness in existing-home sales over the next year as prices continue to ascend. Looking over the past year, Yun said he expects existing-home sales to be up about 10 percent in 2013 to 5.13 million. Sales in 2014 are expected to hold fairly even at about 5.12 million. Reviewing price movements, he said the national median existing-home price should end 2013 about 11 percent higher than 2012, climbing to $197,000. Appreciation in 2014 is expected to be cut nearly in half at about 6 percent. Over the past two years, Yun says existinghome sales have shown a 20 percent cumulative increase, while prices have gained 18 percent. Meanwhile, incomes have only barely risen, coming up somewhere between 2 and 4 percent. "We've come off of record-high housing affordability conditions in the past year, and are now at a five-year low, but conditions are still the fifth best in the past 40 years," Yun said, noting that the median-income family should still be "well-positioned" to buy a home in 2014 in many areas. Aside from affordability, ongoing headwinds include limited inventory and stringent mortgage standards, both of which are expected to continue as housing starts struggle and business costs remain elevated for lenders, according to Yun. On housing production, Yun forecasts 917,000 starts in 2013 and 1.13 million in 2014, which still falls short of underlying demand of about 1.5 million. Sales of new homes are expected to total 429,000 in 2013 and 508,000 in 2014. Based on his forecasts, Yun says the top 10 markets to watch for a housing turnaround in 2014 are Salt Lake City, Utah; Naples and Tampa, Florida; Atlanta, Georgia; Boise, Idaho; Houston, Texas; Charlotte, North Carolina; Denver, Colorado; Seattle, Washington; and Tucson, Arizona.