The FHFA’s principal reduction program announced last week is going to affect relatively few borrowers. The program is extended to approximately 33 thousand eligible homeowners when there are approximately three million underwater borrowers nationwide. According to a report released by the Urban Institute this week, the projected participation numbers in the program are more indicative of an improving economy rather than an overly conservative program.
The relatively low participation numbers can be attributed to a sharp decline in both underwater borrowers and seriously delinquent loans since 2011. In the last five years, the share of underwater borrowers has declined from 25 percent down to 8 point 5 percent in the last five years, primarily due to home price appreciation. Also, the number of seriously delinquent loans has fallen from its peak of 5 point 5 percent in February 2010 down to 1 point 5 percent as of January 2016, mostly due to liquidations and loan modifications.
Declining mortgage default rates combined with rising bank card default rates paint contrasting pictures of consumer behavior, according to S&P/Experian’s Consumer Credit Default Indices for March 2016. Bank card balances and defaults increased while prices remained flat, indicating greater consumer spending; meanwhile, mortgage balances barely increased even though home prices appreciated 5 to 6 percent annually. Most home sales have been existing-home sales, indicating that existing mortgages are being paid at the same time new mortgages are being written.