As home prices rise, fewer homeowners are underwater, or owing more on their mortgage than their home is currently worth. In the first quarter of 2017, 350,000 borrowers regained equity, which dropped the total number of underwater owners to 1.8 million, according to the latest Mortgage Monitor Report from Black Knight Financial Services, a real estate data firm.
The population of underwater homeowners has dropped by nearly 1 million borrowers since last year. This marks the first time the underwater population has dropped below 2 million since 2006.
“The steady upward trajectory of home prices continues to improve the equity positions of many homeowners,” says Ben Graboske, Black Knight Data & Analytics executive vice president. “This is plainly visible in the number of borrowers who are underwater on their mortgages. … Over the past year, we’ve seen a 35 percent decline in the total underwater population, with a 16 percent decline in that population over the first three months of 2017 alone.”
Negative equity has become more concentrated among a particular class of homeowner, Graboske notes. Nearly half of the remaining underwater borrowers live in the lowest 20 percent of homes in their markets.
“While the nation as a whole now has a negative equity rate of just 3.6 percent, among owners in that lowest price tier, it’s over 8 percent,” Graboske says. “In fact, these lowest-price-tier properties are more than twice as likely to be underwater as those in the next price tier up, and 6.5 times more likely to be underwater than those living in the top 20 percent of the market. This is the highest differential we’ve seen between high and low price tiers since we began tracking in 2005.”
Overall, fewer underwater homeowners in the U.S. has made the number of owners with equity zoom to record highs. More than 40 million Americans have “tappable equity” available in their homes, the largest population on record, according to Black Knight. Tappable equity is considered to be borrowers with at least 20 percent of equity in their homes.
“This is the largest this population has ever been,” Graboske says. “If home prices continue to rise at or near their current rate of appreciation, tappable equity will likely hit record highs by this summer.”
Graboske notes that more than half of the nation’s tappable equity is centered in the 10 largest metro areas. California, for example, contains nearly 40 percent of available equity.
“While the growth in tappable equity is obviously good news for both homeowners and lenders alike, it does represent some risk as well,” Graboske notes. “Investors in mortgages and mortgage servicing rights—as well as others with a stake in the broader mortgage market—need to be prepared to account for a higher share of equity-driven prepayment risk, as well as an increased chance of borrowers adding on second liens that primary loan servicers and investors may not be aware of.”
Source: “Monthly Mortgage Monitor/May 2017,” Black Knight Financial Services (July 2017)