Will Underwater Loans Make a Comeback?

Most homeowners have lots of equity thanks to price increases, but a few buyers and refinancers in 2022 currently owe more than their home’s worth.

NEW YORK – Black Knight estimates that about 450,000 U.S. homeowners were underwater as of Sept. 30 because of home price declines – with 60% of those homeowners having bought or refinanced their homes this year.

Although negative equity rates are “far below historical averages, a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the COVID-19 pandemic,” says Black Knight Data & Analytics President Ben Graboske. “For earlier purchases, risk is essentially nonexistent given large equity cushions those mortgage holders are sitting on. More recent homebuyers don’t fare as well.”

More than half of the underwater homes were owned by borrowers who purchased in 2022, with about 5% of homes purchased or refinanced this year underwater and another 19% with less than 10% equity.

For homes bought or purchased in 2021, just 1% are underwater, and 3% have less than 10% equity.

Overall, Black Knight estimates about 1 million homeowners have limited equity in their homes or less than 10%.

“Low or negative equity may have a marginal effect on mortgage performance in the near term, but these borrowers tend to be more susceptible to financial stress and may face additional challenges under a prolonged economic downturn,” according to the data and analytics provider.

Source: Inman (12/05/22) Carter, Matt

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