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Nearly Half of Borrowers Under 40 Sitting Underwater: Zillow
08/23/2012BY: ESTHER CHO
The share of homeowners with underwater mortgages continued its decline in the second quarter, according to the Zillow Negative Equity Report.
About 15.3 million homeowners with a mortgage were underwater, or 30.9 percent, a drop from 15.7 million or 31.4 percent.
The report also revealed that negative equity more often affects younger age groups, with nearly half (48 percent) of borrowers under 40 with an underwater mortgage.
Those between 30 and 34 however, were above that average, with 50.8 percent affected by negative equity. Among those over 50, negative equity was less prevalent for those in the older age category, with only 12.4 percent of people 75 or older affected by negative equity compared to 28.1 percent for those between 50 and 54.
While younger borrowers are more likely to be underwater, they are less likely to be delinquent compared to older groups.
According to the report, underwater borrowers between the ages of 20 and 24 have a serious delinquency rate (90 days or more past due) of 5.9 percent, while the overall rate is 9.2 percent for all underwater borrowers.
“Rising home values in the second quarter caused a decline in the number of underwater borrowers, but young homeowners continue to be disproportionately affected by negative equity,” said Zillow Chief Economist Dr. Stan Humphries. “We hear about tight inventory in many markets, and it’s clear where this is coming from. Negative equity is trapping young people in their homes, preventing them from selling. These homes are likely the very starter homes potential first-time homebuyers are seeking.”
Among the 30 largest markets Zillow tracks, Phoenix saw the steepest drop in negatively equity, falling from 55.5 percent to 51.6 percent. Miami-Ft. Lauderdale also saw a significant drop from 46.4 percent to 43.7 percent.
The Las Vegas metro continues to have a high percentage of mortgages counted as underwater. For the second quarter, its negative equity rate was 68.5 percent.
On the other hand, Boston had a negative equity rate of 15.6 percent.
New short sale requirements for servicers proposed by the Federal Housing Finance Agency are giving financial firms a battle strategy for dealing with reluctant subordinate-lien holders who attempt to delay short sales on points of negotiation.
Some parties in short sales are able to delay the process by objecting to certain conditions and attempting to negotiate higher prices.
Fannie Mae and Freddie Mac launched new short-sale guidelines for servicers to speed up and streamline the process of moving distressed borrowers through a short sale. The guidelines take effect Nov. 1.
The program, which is part of the Federal Housing Finance Agency’s Servicing Alignment Initiative, allows servicers to approve a short sale for borrowers who have certain types of hardships even if they have yet to default.
The program also removes barriers created by some subordinate lien holders by limiting subordinate-lien payments to $6,000. This maneuver essentially cuts off any attempts by the second-lien holders to negotiate for larger payoff amounts.
“By setting a standard payout amount and a limit for every transaction, Fannie Mae is removing the guess work and standardizing the transaction to help accelerate the short sale process,” Fannie Mae said in a statement.
The FHFA’s new guidelines waive deficiencies for borrowers who complete a short sale and gives servicers the authority to approve and complete short sales that conform to the new standards without individual approval from the GSEs.
Borrowers dealing with the loss of a co-borrower, divorce, legal separation, illness, disability or a distant employment transfer will have the option of getting a short sale approved by the servicer before they actually default on a payment. Fannie also is culling down on the amount of documentation required to complete a short sale under hardship circumstances and eliminating certain documentation requirements for borrowers who are 90 days or more delinquent or living with a credit score below 620.
“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us. These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.”
“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” said
FHFA Acting Director Edward J. DeMarco in a statement. “The new standard short sale program will also provide relief to those underwater borrowers who need to relocate more than 50 miles for a job.”
The changes are part of the FHFA’s Servicing Alignment Initiative and will require a streamlined approach with documents, leading to a reduction in documentation requirements. For example, borrowers who are 90 days or more delinquent and have a credit score lower than 620 will no longer be required to provide documentation for their hardship.
The GSEs will also waive their right to pursue deficiency judgments. Borrowers with sufficient income or assets can make cash contributions or sign promissory notes instead.
One major barrier that is also being addressed is the issue with second lien holders. To prevent second lien holders from stalling the short sale process, the GSEs will offer up to $6,000.
The new guidelines will also enable servicers to approve a short sale for borrowers who are not in default but face certain hardships including the death of a borrower or co-borrower, divorce or legal separation, illness or disability or a distant employment transfer.
In addition, all servicers will have the authority to approve and complete short sales that follow the requirements without first going to the GSEs for approval.
Provisions were also created for military personnel with Permanent Change of Station (PCS) orders. Servicemembers who are required to relocate will automatically be eligible for for short sales even if they are current. They also won’t be obligated to contribute funds to pay for the remaining deficiency.
“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, SVP, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us.”
Tracy Mooney, SVP of Single-Family Servicing and REO at Freddie Mac, said, “These changes will make it clear that Freddie Mac servicers have the authority to approve short sales for more borrowers facing the most frequently seen hardships. These changes will further empower the industry to minimize foreclosures and help Freddie Mac in its mission to minimize credit losses and fortify a national housing recovery.”
Fannie Mae will send the announcement for the new changes to servicers Wednesday. Freddie Mac sent their announcement Tuesday.
In April, the GSEs also announced they were setting requirements to have a decision on a short sale offer made within 30-60 days.
The Consumer Financial Protection Bureau is on a roll lately. On Wednesday the bureau proposed requiring that mortgage applicants receive notices of their right to free appraisals.
On Friday, the agency offered up rules to reduce interest rates, do away with points and fees, and screen mortgage loan officers.
In the first of a slew of new rulemaking proposals, the CFPB would require lenders to make available loans that are stripped of their origination points and discount fees for certain consumers. Applicants unlikely to qualify for mortgage loans would be excluded from the option.
The second would task lenders with reducing interest fees for mortgage loans if borrowers elect to make upfront payments.
“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” CFPB Director Richard Cordray said in a statement. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”
A release reaffirmed several other proposals tougher on screening standards for mortgage brokers and originators.
Among those, the proposals would require background checks for loan officers and bar arbitration clauses for credit insurance practices. A release also affirms an earlier rule proposal by the Fed to block loan officers from steering borrowers into higher-priced mortgage products for reasons related to their pay.
“Consumers benefit from a vibrant and competitive mortgage market with a diversity of players, and this rule, as it relates to loan originator qualification and screening, should ensure a level playing field for originators regardless of business model,” he said.
According to the release, the public has until October 2012 to comment on the rules before the CFPB finalizes these in January 2013.