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Your quote from the Federal Reserve directly supports my statement; it just quantifies that ~10% negative equity + a liquidity shock is a good predictor of defa

Your quote from the Federal Reserve directly supports my statement; it just quantifies that ~10% negative equity + a liquidity shock is a good predictor of default. Put another way, I was suggesting that there is hysteresis in the response to negative equity. That said, my statement would have been much less confusing if I had explicitly acknowledged the connection. Perhaps, "Negative equity doesn't immediately trigger a distressed mortgage, or..." Furthermore, my central claim -- that the total fraction of houses with negative equity is a poor predictor of default risk -- is unaffected either way. It would be more useful to know the distribution of negative equity for those houses, or summary statistics like the mean or median negative equity. (If we knew that the median negative equity were 10%, then we could predict that about half of the 16.9% of all properties that are upside down are at risk of default if they experience a liquidity shock.)

toomuchtodo 11y ago
My mistake then! Here is more data. I believe anyone in the 100% to 120% LTV will stay current on their mortgage; anyone else above 120% LTV? Highly possible they'll default. From Zillow: "Nationally, of the homeowners who are underwater, around half are only underwater by 20 percent or less, which is to say they are close to escaping negative equity. (Figure 2) On the other hand, 1.9 percent of all owners with a mortgage remain deeply underwater, owing at least twice what their home is worth. Of the largest metro areas, markets with above average rates of deeply underwater homeowners include Las Vegas (3.8 percent), Chicago (3.8 percent), Atlanta (3.5 percent), Detroit (3.3 percent) and Miami (2.8 percent)" Almost half of the borrowers with negative equity have a LTV of 100% to 120% (8.2% in Q4 2014). Most of these borrowers are current on their mortgages - and they have probably either refinanced with HARP or their loans are well seasoned (most of these properties were purchased in the 2004 through 2006 period, so borrowers have been current for ten years or so). In a few years, these borrowers will have positive equity. The key concern is all those borrowers with LTVs above 140% (about 5.2% of properties with a mortgage according to Zillow). It will take many years to return to positive equity ... and a large percentage of these properties will eventually be distressed sales (short sales or foreclosures).

toomuchtodo 11y ago

My mistake then! Here is more data. I believe anyone in the 100% to 120% LTV will stay current on their mortgage; anyone else above 120% LTV? Highly possible they'll default. From Zillow: "Nationally, of the homeowners who are underwater, around half are only underwater by 20 percent or less, which is to say they are close to escaping negative equity. (Figure 2) On the other hand, 1.9 percent of all owners with a mortgage remain deeply underwater, owing at least twice what their home is worth. Of the largest metro areas, markets with above average rates of deeply underwater homeowners include Las Vegas (3.8 percent), Chicago (3.8 percent), Atlanta (3.5 percent), Detroit (3.3 percent) and Miami (2.8 percent)" Almost half of the borrowers with negative equity have a LTV of 100% to 120% (8.2% in Q4 2014). Most of these borrowers are current on their mortgages - and they have probably either refinanced with HARP or their loans are well seasoned (most of these properties were purchased in the 2004 through 2006 period, so borrowers have been current for ten years or so). In a few years, these borrowers will have positive equity. The key concern is all those borrowers with LTVs above 140% (about 5.2% of properties with a mortgage according to Zillow). It will take many years to return to positive equity ... and a large percentage of these properties will eventually be distressed sales (short sales or foreclosures).