The Boston Federal Reserve released a paper analyzing negative equity.
Here’s the conclusion:
The initial key conclusions of this paper can be summed up in two statements which,
at first blush, appear contradictory. The first conclusion is that most borrowers
who lose their homes have negative equity. The second is that most borrowers with
negative equity will not lose their homes to foreclosure. The first statement reflects the
necessity of negative equity for foreclosure—borrowers with positive housing equity
will sell if they need to move. The second statement addresses the fact that the
default decision involves weighing the payments on the mortgage against the income,
imputed or actual, that accrues from retaining ownership of the house.
The second important set of conclusions follows from the first, by illustrating that
policy responses need not, and probably cannot, address the negative equity problem
directly. Instead, these policies should focus on lowering current mortgage payments
in order to make default less attractive to the borrower. Forbearance programs that
allow borrowers to delay, but not to avoid eventually repaying the mortgage in full can
help at-risk borrowers without generating serious moral hazard problems, involving
assistance, funded at the public’s expense, to those who do not need it.
Zillow’s data on negative equity shows that more than half of 2006 buyers are now upside on their loan. Here is grim information on homeowner equity.
