Fitch: Impact of High Underwater US Mortgages Behind Most FIs

The volume of homes worth less than their mortgage balances continues to describe a US housing market still in recovery, but the impact of these loans on the credit profiles of mortgage-dependent financial institutions such as mortgage insurers (MIs), title insurers and lenders is small and diminishing, says Fitch Ratings.

Last week, Corelogic reported that underwater mortgages nationally were at about 11%. According to the Zillow Real Estate Research's 4Q 2014 Negative Equity Report also released last week, negative equity nationally was steady at 16.9% in Q4 2014, despite home values increasing almost 6%. The latter report highlighted that underwater mortgages were more of a lingering issue for lower-value homes than in higher end markets.

Underwater mortgages have some potential to impede home owners from listing their homes, thus affecting available inventories, home prices and overall mortgage activity. However, as most home owners are not contending with underwater mortgages, most financial institutions should still find a large enough market for their services.

For MIs, the volumes of pre-2008 vintage polices remains a significant but diminishing portion of these firms' total covered mortgage exposure, or risk-in-force. Many of the 97% loan-to-value loans from before the crisis remain outstanding. And while many MIs have benefited from government and other loan modification programs, some borrowers with modified mortgages can re-default with worse recoveries than would have occurred without the modification.

For the title insurers, underwater mortgage issues are less significant. However, many of the more underwater markets noted in the recent data, such as Arizona, Florida, Georgia, Illinois, Nevada, and Michigan, represent approximately 24% of total title direct written premiums in 2014. None of the four major title insurance companies have greater than a 21% concentration to any of the six aforementioned states and the highest concentration to all six states was 30%. Despite the underwater mortgage issue, Fitch anticipates title insurer revenues to grow modestly in 2015 as improving housing market fundamentals lift prices for homes.

For large and mid-tier regional banks as well as community banks, holding underwater mortgages means higher losses given default levels on loans, which are likely already reflected in allowances for loan losses since the beginning of the housing downturn. Thus, while underwater mortgages could portend higher loan losses under a stress scenario, we see rising home valuations as having a stronger influence on asset quality generally that may ultimately become a more significant factor on mortgage activity broadly.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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