Deutsche Bank on "underwater borrowers"

Yesterday, Deutsche Bank released a new report on housing that is, to put it mildly, "at odds" with the more mainstream view that green shoots are popping up everywhere in the nation's housing market. This report at Reuters provides a summary of the findings.

About half of mortgages seen underwater by 2011
The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

The year 2011 is about five or six years from the peak of the housing bubble a few years back, meaning that the average period of home ownership (seven years?) will soon be a major factor in turning "prime borrowers" into "walk away" candidates.

Really! Has anybody - even with the most pristine credit history - ever sold their house at a major loss and made up the difference with the bank when they could just throw in the towel? And what's the likelihood of that happening now, after millions of Americans have seen trillions of dollars directed at bailing out the banks.

Here's a table from the report to help put things into better focus.
Back to the Reuters story with an alarming forecast for home prices - one that politicians, policymakers, and homeowners across the land are sure not to like...

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

"For many, the home has morphed from piggy bank to albatross," the analysts said.

Haven't heard that phrase for a while - "affordability products".

They were all the rage in California when the housing bubble was at its bubbliest stage back in 2005-2006. Elected officials were scurrying about in Sacramento trying to find ways to back even wackier loans to allow even more people to buy even more overpriced houses.