Offering principal reductions to delinquent borrowers could cost banks up to $89 billion in write-downs, according to a new report from the data and analytics division of Black Knight Financial Services.
The firm examined the question following the Senate Banking Committee’s taking up the topic in a recent hearing. According to Black Knight, 4 million borrowers nationwide are currently underwater, with an average of $39,000 in negative equity. About 40 percent of underwater loans are delinquent, a rate 10 times higher than on mortgages with equity. If banks were to offer such borrowers principal reductions, reducing their monthly payment and potentially enabling them to become current, it could cost up to $89 billion. On delinquent underwater mortgages held by Fannie and Freddie alone, principal reductions would require up to $18 billion, and impact 365,000 borrowers.
"Over the past two and a half years, there has been sustained and continual improvement in the number of underwater borrowers in this country," Trey Barnes, Black Knight’s senior vice president of loan data products, said in a statement. "From 33.5 percent of borrowers being in negative equity positions in January 2012, we’re now looking at less than 8 percent of borrowers underwater. However, there are still 4 million borrowers who owe more on their mortgages than their homes are worth, despite more than two years of relatively steady home price appreciation … the scope and cost of write-downs would be immense … to right-side these borrowers."
Black Knight also noted in its report some increased appetite for risk among lenders in October. While still historically high, there has been some relaxation in credit requirements for refinance originations, with weighted average credit scores for GSE refinances have come down to 742 from a high of 766 in late 2011, according to Black Knight. Credit requirements on GSE purchase mortgages, on the other hand, have remained tight, with average credit scores remaining relatively steady since 2009 and currently at 757.
Looking at GNMA-backed originations – historically serving borrowers with lower credit profiles – Black Knight again sees some relaxation in refinance credit requirements, with a weighted average credit score of 701. This is markedly higher, though, than the pre-crisis average of 628 in 2005. Likewise, credit scores on GNMA purchase loans are now an average of 703, up sharply from 2005’s 660 average.
