Wither the equity cushion (revisited)

Reading through a few paragraphs toward the end of today's front page WSJ story($) on the plight of subprime homeowners Mario and Leticia Montes stirred memories of the "equity cushion" talk emanating from the Federal Reserve a year or two ago.

Being stuck with little or no home equity is no longer a rare situation. Christopher Cagan, director of research at First American CoreLogic, a housing and mortgage data supplier in Santa Ana, recently found that nearly 7% of 32 million U.S. households studied as of December owed more than their homes were worth, based on computer estimates of the property values. An additional 4% had home equity of 5% or less. Since then, house prices have edged down in much of the country, erasing more home equity.

Without a cushion of equity, homeowners are vulnerable to losing their homes to foreclosure if they suddenly are out of work, suffer a serious illness or, like the Montes family, face a jump in mortgage payments.

Partly as a result, foreclosures are surging. Moody's Economy.com, a research firm in West Chester, Pa., projects that lenders will acquire about 760,000 homes through foreclosure this year and 935,000 in 2008, up from an average of about 440,000 a year from 2000 through 2006.

Apparently, in some circumstances, a "bed of nails" lies underneath the "equity cushion" only to be felt in a very painful way when the equity cushion withers away.

These excerpts from a post last November provide all the particulars on the origins and usage of the term that applies to fewer and fewer homeowners:

As it relates to the housing boom, the term "equity cushion" appears to have its origins in this speech by San Francisco Fed Governor Susan Schmidt Bies in April of last year (2005).

Another concern is that house prices will reverse and erase a considerable amount of home equity built up in recent years. Recent gains in house prices have been notable: the average house price rose 11 percent in 2004, and cumulative gains since 1997 now top 65 percent... It is true that some households have considerably less equity in their homes, and these households tend to have lower income and fewer other financial assets to cushion shocks.

This address by Fed Chairman Greenspan last September (also 2005) appears to have formalized the term, defining both its size (sizeable) and its primary usage (absorbing declining home prices).

In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.

Shortly after the Fed chairman's comments above, Ms. Bies was again at it with this speech.

Despite the apparent decline in underwriting standards, less than 5 percent of outstanding mortgages have a loan-to-value ratio greater than 90 percent, which means that the vast majority of homeowners have a significant equity cushion; in the event prices fall, only a very small percentage of owners are likely to see their debts exceed the value of their homes.

Also of note in the November 2006 post is a link to this October 2005 offering regarding the Equity Cushion Possibilities for one Ms. Rodriguez who was featured in the LA Times wondering if she hadn't borrowed and spent too much money extracted from her home.

The subject of "equity cushions" didn't appear in page one stories at the Wall Street Journal in late-2005 - maybe they should have.

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UPDATE: August 16th, 1:50 PM

This just in from The Onion, courtesy of -A.