Economic Policy Review
Below the Line: Estimates of Negative Equity among Nonprime Mortgage Borrowers
July 2009 Volume 15, Number 1
JEL classification: E42, N22, E58

Authors: Andrew F. Haughwout and Ebiere Okah

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.

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