LOS ANGELES, CA — Feb. 18 (FreeRateUpdate.com) – Standard and Poor’s released an excellent research piece this week detailing the tidal wave of short sale and foreclosed homes that will be coming on the market this year. This is the dirty secret inside the housing industry. This risk is widely known by the people that work in the guts of the mortgage business and that is w
hy lending requirements have been so tight for the last two years. Client’s didn’t understand the need to have 20-30% equity for their jumbo loan refinance or as a down payment for their new jumbo mortgage. The requirement is mostly in place to limit bank risk but does provide an extra safety net for the homeowner as well.
Once a person has little to no equity their odds of walking away/defaulting in the event of an income cut or job loss quadruples vs a homeowner with a large equity cushion. In a distressed housing and lending environment the equity cushion benefits the bank and the borrower because in a distressed situation the homeowner could sell the home before any serious delinquency issues develop.
The strict equity requirements will remain in place for at least 1-2 years in our opinion and could actually increase depending on how values hold up in the 1-4m dollar luxury home segment during the spring and summer. The overall view of various risk analytics companies such as S&P, Moody’s and the Loan Performance Group of Corelogic is that high-end property values will continue to decline nationally especially within the states with were formal bubble markets and areas with high unemployment rates.
We have left the era of low unemployment, steady bonus increases, stable home values and are in an era of personal financial risk that most homeowners have never seen before. We strongly encourage homeowners that are wanting/needing to refinance their jumbo loan in the next few years to consider their personal and individual housing market risks as the most important factors and make this a financial priority this year.
You can read the entire piece via the S&P website, but I’ll save you some time and give you the summary:
We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one. Loan modifications and the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the demonstrated shadow inventory of troubled loans. Ultimately, the majority of the properties these distressed loans represent will likely have to be liquidated.
Our estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009
Moreover [this] only accounts for expected defaults for mortgages outstanding in the private securitization market (which makes up less than a third of the total securitization market and less than 5% of the total mortgage market).
While we do not expect all of these distressed properties to liquidate at the same time, the significant percentage of the current supply that these distressed loans represent does reveal the potential future increase in housing supply. An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand.
