Among other troubling signs, more borrowers are finding themselves with loan balances that exceed the market value of their homes.
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The Intercontinental Exchange (ICE) recently produced a report that sparked a lot of coverage from paywalled financial blogs. Coverage focused on the number of underwater mortgages in the country, citing a number approaching 900,000. It’s worth a look in the actual exhibitionwhich does not state the number of 900,000 but instead shows the number of 875,000 mortgages, about 1.6% of all mortgages have negative equity. The report isn’t sounding any alarm bells, but the rising number of these mortgages is a worrying sign.
What does it mean to be “underwater” on a mortgage? The ICE report simply defines it as “mortgage holders [that] they owe their houses more than they are worth.’ In my view, this is a gross underreporting of this phenomenon. The methodology used by ICE to determine this is proprietary. There are many thousands of housing markets in the United States along with millions upon millions of mortgage holders. Whether a home and its mortgage are underwater depends entirely on the price the home would fetch if sold and what the balance is on a loan, and knowing which home and mortgage is or isn’t underwater is entirely hypothetical until a buyer and seller meet.
However, I’m sure ICE is on to something here, and I’m confident that the numbers represent some relationship to reality. After tracking this data for years, ICE concludes that “negative equity rates, after years at record lows, have risen slightly toward more typical levels” and this is “the highest rate in three years, but comparable to pre-COVID levels and long-term averages outside the Great Financial Crisis.” The report also finds that borrowers with limited equity, less than 10%, in their home have also increased to 6.9% of borrowers, the highest number since 2020. Also remember that in October I wrote about how foreclosures are also on the rise.
And those foreclosures are tracking along with negative equity, with a concentration in Florida and places like Austin, Texas.
“In Cape Coral, Florida, where home prices are down 15% from their peak, 11% of mortgages are underwater, including more than a third of those originated in 2023 and 2024,” and “in Austin, with prices down 21% from their highs, nearly 7% of mortgages, including about 20, are underwater. 15% from 2023 and 2024”.
The ICE report somewhat dismisses these levels as simply reaching levels that are “typical” and that there is no indication that the bottom is about to leave the long-term single-family mortgage economy.
But this is a deeply serious systemic problem. Loans across the country for all kinds of things can go under the water, but when said loans make up 16.3% of the country’s Gross Domestic Product (GDP), any upward trend in loans that could fail is little more than an engine check signal. What is needed is not just a dashboard like the one provided by ICE, but an active effort to develop a parallel financing system for property that is not so dependent on bank debt, securitization and inflation. We have created a system for housing finance based on each of these, which on their own make sense for various commodities, but when combined in such a critical area it is a problem. Remember 2008? Our financial system does not show.
