A report from the government indicates that following a two-year surge, the share of nonprime borrowers with loan-to-values above 100 percent has leveled off.
Negative equity for nonprime borrowers generally increased between 2006 and mid-2008 then changed little through the end of last year, the U.S. Government Accountability Office reported. But seven states saw upside-down borrowers increase 30 percentage points, while 18 experienced increases less than 5 percentage points.
The findings were outlined in a letter to Rep. Carolyn B. Maloney (D-N.Y.), chair of the Joint Economic Committee, and Sen. Carles E. Schumer (D-N.Y.), vice chairman of the committee. The report is part of a broader examination of the evolution and condition of the nonprime market, which includes subprime and Alt-A mortgages.
The agency used data from CoreLogic’s asset-backed securities database for active nonprime loans originated from 2000 through 2007. The database reportedly reflects around nine-in-10 nonprime first liens backing non-agency securities. CoreLogic’s state-level Single Family Combined House Price Index was also utilized for GAO’s report.
Nonprime borrowers experienced an increase of negative equity, rising from around 0.9 million borrowers for 13 percent at the beginning of 2006 to approximately 2.5 million for 35 percent by the end of 2008. The rate stayed between 36 percent and 37 percent through the end of 2009 as new subprime originations disappeared and many existing loans were either foreclosed or prepaid.
Arizonans and Floridians saw the biggest increase in negative equity: 44 percentage points. California’s rate rose by 4.2 percentage points each period from the first-quarter 2006 through the second-quarter 2008. But borrowers in North Dakota, Oklahoma and South Dakota saw less than a one percentage point increase in negative equity.
Loan-to-values in excess of 100 percent for nonprime borrowers as of June 30, 2009, was estimated at 9 percent in Denver and more than 90 percent in Las Vegas.
“Borrowers with nonprime loans may be particularly vulnerable to negative equity because they typically make small down payments and thus have less equity at the outset than a typical prime borrower,” the report stated. “Also, some nonprime borrowers have loans with payment options that allow them to defer payment of accrued interest, thereby increasing the outstanding loan balance and decreasing equity.”
Growth in nonprime delinquency of at least 90 days including foreclosures, based on the number of loans, rose from 0.3 million loans for 4 percent in the first-quarter 2006 to 1.4 million loans for 28 percent by the fourth-quarter 2009.
Delinquency growth ranged from 5.3 percentage points in Louisiana to 43.3 percentage points in Florida.
GAO noted that the risk of delinquency on nonprime mortgages substantially increases in tandem with negative home equity.
“Six of the 10 states that experienced the largest percentage point increases in negative equity rates also were among the 10 states with the largest percentage point increases in serious delinquency rates,” the report said. “For example, Arizona experienced the largest increase in negative equity rate (rising by 44.3 percentage points over the 4-year period) and the fifth largest increase in serious delinquency rate (rising 28.7 percentage points).”
The report also indicated that nonprime loans perform better when originated outside the securitization process.
GAO said more details will be made available in a subsequent report.
