450,000 Homebuyers Who Bought In 2022 Are Underwater On Mortgages

This needs to be put in perspective! Select Market/Select Loan Types (VA LOANS).

Let's break it down.....Don't panic!

About 270,000 homebuyers who bought during the red-hot housing market this year already owe more than their house is worth, a new analysis found.

Among the 450,000 underwater borrowers in the third quarter, nearly 60% had mortgages originated in the first nine months of 2022, Black Knight found. That's about 1 in 12 homes purchased in 2022 with a mortgage, or 8%. Nearly 40% of homes bought this year have less than 10% of equity left to tap.

Lower-income households are hurt the most
Borrowers with purchase loans backed by the Federal Housing Administration (FHA) or Veterans Affairs (VA) were most likely to have slipped underwater, the report found. These are more popular among first-time and lower-income buyers.

Those with FHA loans faced the largest equity challenges, Black Knight found, with more than 25% of folks with FHA loans falling underwater. Additionally, some 80% had less than a 10% equity stake in their homes.

Early-payment defaults (EDP) — loans delinquent within six months of origination — were also rising across product types in recent months with the largest increases among FHA borrowers over the past year. As of October, EDP rates for FHA loans were 150% above 2013-2018 levels, and 25% above their early 2000 averages, the report found.

By contrast, early-payment defaults among those with conforming loans were more than 70% below early 2000 levels, and VA loans were less than half that same threshold.

“Such loans [FHA] rely on rising home values and principal pay-downs over time to gradually improve their equity position,” Graboske said. “This is ... unfortunately, a potentially vulnerable cohort that we will continue to keep a close eye on in the months ahead.”

Recent buyers at greater risk
Most of the folks at risk of having their loans slip underwater were those who purchased when home prices were at their highest, Black Knight found. At least 10% of June purchase originations – when home prices peaked at $438,000 – were underwater, with more than 30% having less than 10% equity.

Although home prices have cooled for the last seven months, with prices now 3.2% down from June’s high, the pricing adjustment hasn’t been enough to ease homebuyers' affordability concerns.

“In a world of interest rates 6.5% and higher, affordability remains perilously close to a 35-year low,” Graboske said. “Risk among earlier purchases is essentially nonexistent given the large equity cushions these mortgage holders are sitting on. More recent homebuyers don’t fare as well.”

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