Below the Line: Estimates of Negative Equity among Nonprime Mortgage Borrowers

Museum & Visits Regional Economy Data & Statistics Careers Blog Press Center

About the New York Fed
- About the New York Fed
- What We Do
- Who We Are
  - Bank Leadership
- Communities We Serve
- Governance
- More About Us
- At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
  
  The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
  
  Do you have a request for information and records? Learn how to submit it.
  
  Learn about the history of the New York Fed and central banking in the United States through articles, speeches, photos and video.
Markets & Policy Implementation

Economic Research
- Economic Research
- U.S. Economy
  - Consumer Expectations & Behavior
  - Growth & Inflation
  - Labor Market
  - Financial Stability
  - Banking
- REGIONAL ECONOMY
- RESEARCHERS
  - PUBLICATIONS
  - RESEARCH CENTERS
  - CALENDAR

Financial Institution Supervision
- Financial Institution Supervision
- Supervision & Regulation
  - Circulars
  - Regulations
- Reporting Forms & Instructions
  - Reporting Forms
  - Correspondence
- Bank Applications
- Consumer Protection
  - Community Reinvestment Act Exams
  - Frauds and Scams
- As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
  
  The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
  
  Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
  
  The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
Financial Services & Infrastructure
- Financial Services & Infrastructure
- Financial Services & Operations
- Financial Market Infrastructure & Reform
- The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
  
  The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
  
  The growing role of nonbank financial institutions, or NBFIs, in U.S. financial markets is a transformational trend with implications for monetary policy and financial stability.
  
  The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
Community Development
& Education

Economic Policy Review Executive Summary

Below the Line: Estimates of Negative Equity among Nonprime Mortgage Borrowers

Recapping an article from the July 2009 issue

Contact author

of the Economic Policy Review, Volume 15, Number 1

View full article PDF

13 pages / 383 kb

Authors: Andrew F. Haughwout and Ebiere Okah

Disclaimer
Index of executive summaries

The 2004-06 boom in nonprime mortgage lending in the United States was quickly followed by a spike in the rate of delinquencies and defaults on these loans.
Evidence from the current downturn suggests that declines in house prices—or, more precisely, reductions in borrower equity—are key contributors to delinquencies and defaults.
To better understand and respond to the foreclosure crisis, policymakers are turning to measures of negative equity, in which the value of a property is below the property's mortgage balance.
Haughwout and Okah estimate negative equity in the U.S. nonprime mortgage market for 2008-09 to describe the sources of the problem and the characteristics of borrowers “below the line.” They combine information from house price indexes with data on individual loans to gauge the prevalence and magnitude of negative equity across various dimensions, including the location of the property and the year in which the mortgage originated.
The study finds that nonprime borrowers in negative equity share several characteristics: for example, they took out loans near the peak of the housing market and their mortgages had high loan-to-value ratios usually achieved with subordinate liens.
In addition, borrowers in negative equity are twice as likely as those in positive equity to be seriously delinquent, or in default, on their first-lien mortgage.
Haughwout and Okah also show that while negative equity loans exist in most U.S. metro areas, they are disproportionately concentrated in housing markets that experienced especially large swings in house price appreciation, particularly in California.
The authors’ results also suggest that if house prices fall an additional 10 percent from December 2008 levels, about 1.5 million new mortgages nationwide will be in negative equity; the aggregate difference between these balances and house values could reach $135 billion.

About the Authors

Andrew F. Haughwout is an assistant vice president and Ebiere Okah an assistant economist at the Federal Reserve Bank of New York.

Disclaimer

The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.