|
Negative
Amortization ( Neg Am )
What
We Own Vs. What We Owe
By Kenneth R. Harney
Saturday, February 25, 2006
Billowing appreciation rates
have been the hot news in real estate for much of the past three years. But
now, with many of the most effervescent local markets calming, the focus is
turning to something much more fundamental: homeowners' equity stakes.
How big is your home-equity
cushion? How much more is your home worth compared with the debt you've
loaded onto it -- primarily your first and second mortgages and credit
lines? Do you have a 20 percent equity stake? Less than 10 percent?
The popular image is that
America's homeowners
are turning into debt junkies, hocking their houses to the hilt and banking
on double-digit appreciation rates to bail them out. But a new analysis of
home equity holdings nationwide suggests that the reality is much more
nuanced. On the one hand, it is true that a surprisingly large percentage of
recent home buyers have minimal, even negative, equity levels. On the other
hand, most homeowners have substantial net equity holdings -- $11 trillion,
almost double what they had just five years ago.
The study tapped into
proprietary mortgage and real estate valuation databases maintained by
subsidiaries of Santa Ana, Calif.,-based First American Corp., a title
insurance, credit and settlement services company. Christopher L. Cagan,
director of research and analytics for First American Real Estate Solutions,
was the primary investigator. The data included appraisal or valuation
information on 26 million homes in 36 states and the
District of Columbia as of
September, and data on nearly 20 million active mortgages originated in 2004
and 2005.
Some of the findings appear to
support the stretched-to-the-limit, debt-binging picture critics paint of
today's homeowners and borrowers. Among 2004-05 borrowers:
· Nearly 1 in 10 was in a zero
or negative equity position. Five percent were in negative territory by more
than 10 percent; that is, their combined mortgage debts exceeded their home
values by more than 10 percent.
· Nearly 30 percent had equity
cushions of less than 20 percent. Forty-four percent had less than a 30
percent cushion.
· State-by-state net equity
holdings were sobering in some cases. More than 28 percent of
Colorado buyers or refinancers
had less than 5 percent equity in their properties. Nearly 24 percent of
Ohio owners were in the same situation, as
were 13 percent in the District and around 11 percent in
California and
Florida.
Equity levels are important
measures of household financial health and a key component of net worth. Low
equity makes owners more vulnerable to economic shocks and rising interest
rates. If these owners had to sell in a pinch, they could find themselves
walking away with little or nothing at the end of the transaction. If
property values declined even modestly, large numbers of recent buyers with
minimal equity stakes could slip to the negative side.
But overall, the state of the
nation's home equity holdings is hardly so dire. The First American study
cites Federal Reserve research findings that contrary to some critics'
assumptions, most
U.S. homeowners have
plenty of equity -- 57 percent stakes on average. Five years earlier, the
figure was almost the same, 58 percent.
Not surprisingly, households'
equity positions vary by the age of their mortgages. Eight in 10 people who
took out their mortgages in 1985 have equity stakes of 75 percent to 80
percent, because of price inflation and paying down principal. Sixty-five
percent of borrowers whose loans date to 1990 have 50 percent to 55 percent
equity positions. Roughly half of 2001 buyers and refinancers have equity
stakes grow of 25 to 30 percent.
In contrast, the most recent
borrowers tend to be thin on equity because of high housing prices, low down
payments, "piggyback" second loan programs, plus widespread use of
interest-only and "payment option" plans that cut monthly payments
significantly but may add to principal debt. Nearly 30 percent of 2005's
borrowers have zero to negative 5 percent equity positions. Some -- but not
large numbers -- of those low-equity homeowners who face hefty payment
"resets" on interest-only and negative-amortization loans in the coming two
to three years will end up in hot water, Cagan said.
But most will not. And need not.
The upshot: If you've got a low-equity mortgage that's heading for a reset,
plan ahead now. Make sure you have a financial action strategy to handle
what's coming. Why risk the equity you already have, plus the equity you're
almost certain to accumulate in the future?
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.
© 2006 The Washington Post Company
|
