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

13 Pages Posted: 17 Jul 2009

See all articles by Andrew Haughwout

Andrew Haughwout

Federal Reserve Bank of New York

Ebiere Okah

Federal Reserve Banks - Federal Reserve Bank of New York

Abstract

Measures of housing units with negative equity, in which the mortgage balance exceeds the value of the collateral housing unit, have become a necessary component in crafting policies to address the current foreclosure crisis. This article estimates negative equity in the U.S. nonprime mortgage market for 2008-09 to describe the sources of the problem and the characteristics of borrowers in negative equity. The authors combine information from house price indexes with data on individual loans to estimate the prevalence and magnitude of negative equity across various dimensions, including the location of the property and the year in which the mortgage originated. They find that negative equity is closely associated with the time and place of mortgage origination and with the existence of subordinate liens against the property. In addition, borrowers whose mortgage is worth more than their house are twice as likely as borrowers in positive equity to be seriously delinquent, or in default, on their first-lien mortgage. The study also uses information derived from housing price futures contracts to estimate the path of negative equity beyond 2009.

Keywords: nonprime mortgages, housing markets, negative equity

JEL Classification: E42, N22, E58

Suggested Citation

Haughwout, Andrew F. and Okah, Ebiere, Below the Line: Estimates of Negative Equity Among Nonprime Mortgage Borrowers. Economic Policy Review, Vol. 15, No. 1, pp. 32-43, July 2009, Available at SSRN: https://ssrn.com/abstract=1430997

Andrew F. Haughwout (Contact Author)

Federal Reserve Bank of New York ( email )

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Ebiere Okah

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States