A staggering 270,000 people who purchased homes in 2022 are now “underwater” on their mortgages

A staggering 270,000 people who purchased homes in 2022 are now "underwater" on their mortgages.

The red-hot housing market in 2022 already has an estimated 270,000 homebuyers who owe more than their house is worth. According to Black Knight’s analysis of the 450,000 underwater borrowers from Q3 this year, around 60% had mortgages issued during the first nine months of 2022 – that’s one out of every twelve homes purchased with a mortgage! Additionally, nearly 40% have less than 10% equity left for any potential withdrawals.

The numbers demonstrate the severe consequences of skyrocketing mortgage rates, which have caused housing values to depreciate at a historically quick pace month after month.

According to Ben Graboske, President of Black Knight data and analytics, “Though the home price correction has slowed, it has still exposed a meaningful pocket of equity risk. Make no mistake: negative equity rates continue to run far below historical averages, but a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic.”

Lower-income households experience the most detriment from this issue

According to the report, borrowers with purchase loans supported by either the Federal Housing Administration (FHA) or Veterans Affairs (VA) were most likely to become underwater on their mortgage payments. These loan types tend to be preferred among first-time and lower-income buyers.

In accordance with Black Knight’s findings, those with FHA loans had the most difficulty when it came to equity in their homes. In fact, more than 25% of them were underwater and a remarkable 80% possessed less than 10% equity stake.

The latest data shows that early-payment defaults (EDP) for loans have been rising in recent months, with the biggest increase among FHA borrowers. According to October figures, EDP rates for these types of borrowers were a staggering 150% above their 2013-2018 averages and 25% more than 2000 levels. These results are concerning indicators for loan origination practices across the board.

In comparison, delinquent payments among borrowers with conforming loans are over 70% lower than in the early 2000s. For VA loan holders, that percentage is even more remarkable – less than half of the original benchmark!

As Graboske noted, the FHA loans depend on increasing house prices and principal reduction over time in order to steadily build their equity levels. Consequently, this group of borrowers is at risk of financial instability; hence it’s vital that we continue observing them closely down the line.

Recent purchasers are exposed to greater peril

Black Knight’s research revealed that most people who are in danger of having their loans sink underwater were the ones who bought when home values hit record highs. In June, 10% of all new mortgage originations made at a time when median house prices had reached $438,000 already were below water and more than 30% only had about 10 percent equity or less.

Home prices have cooled in seven successive months, with a 3.2% reduction from June’s peak; yet this price adjustment has been insufficient to alleviate the affordability issues of house purchasers.

According to Graboske, the current interest rates of 6.5% and higher have pushed affordability near its lowest point in 35 years — yet those who bought long ago are resting on a pile of equity and at little risk. Unfortunately, newer homebuyers don’t share that same security.

Mortgage rates potentially contribute to the gradual pace of price corrections, as Graboske states that this has a dampening effect on inventory and stalls home sales activity. The number of new homes available for sale is 19% lower than its 2017-2019 average; this discrepancy is even more prominent since March and April 2020 due to the pandemic induced lockdowns. This stands out as one of the most significant deficits in six years!

As stated in the report, current market shortages exceed half a million listings compared to historical norms.

Graboske asserted that, due to the effects of usual seasonality and ongoing inventory shortage, we have seen a more subdued price correction than what was initially anticipated. This is because these two factors are working in tandem with one another to mitigate the effect on prices.

In summary, the findings of Black Knight’s research illustrate that recent borrowers are at a greater risk of becoming underwater on their mortgage payments. Although home prices have cooled off in recent months, they remain far above what most buyers can afford, resulting in an alarming number of loan defaults and increasing delinquencies among those who have taken out FHA loans. The current housing market shortages and mortgage rate fluctuations have further exacerbated this issue, presenting a major challenge to homebuyers in the coming year. To ensure financial stability for those who are taking out mortgages, it is important that lenders continue to observe these trends closely and adjust their loan origination practices accordingly.

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