According to Jody Shenn of Bloomberg.com, Barclays Capital has reported that about half of subprime and Alt-A borrowers will soon either have little equity in their homes or will actually owe more on their mortgages than their homes are worth. This will put an additional $800 million of debt at greater risk of default.
New York-based analysts Ajay Rajadhyaksha and Derek Chen wrote, “Mortgage loans are moving underwater at a very sharp pace, far more than suggested by aggregate home price data.”
Among Alt-A mortgages that are underwater, 33 percent are at least 60 days late. The delinquency rate for equivalent underwater subprime loans is 58 percent. As more borrowers slide underwater, about 26 percent of subprime loans will have equity of less than 10 percent by midyear.
The odds that a borrower will default rises when the borrower owes more on a property than they can recoup in a sale. The dividing line seems to be 20 percent equity. Homeowners with equity of 20% or more in their home are far less likely to miss a payment. Credit Suisse has reported, “Borrowers who have never been delinquent on a subprime mortgage are three times more likely to miss a payment if they have less than 20 percent equity in their homes, when compared with similar borrowers with more equity.”
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