Low home equity thin ice for some

Billowing appreciation rates have been the hot news in home real estate. But with many markets cooling, the focus is turning to something much more fundamental: homeowners’ equity stakes.

How big is your homeequity cushion? How much more is your home worth compared with the debts you’ve loaded on it — primarily your first and second mortgages and credit lines? Do you have a 20 percent equity stake? Less than 10 percent?

The popular image is that America’s homeowners are turning into debt junkies, hocking their houses to the hilt and banking on double-digit appreciation rates to bail them out.

A comprehensive new analysis of home-equity holdings nationwide suggests that the reality is much more nuanced.

True, a surprisingly large percentage of recent home buyers has minimal or even negative equity levels. On the other hand, most homeowners have substantial net-equity holdings: a record $11 trillion, almost double what they had five years ago.

The study tapped into proprietary mortgage and real-estate valuation databases maintained by subsidiaries of First American Corp., a giant title-insurance, credit- and settlementservices company. Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, led the investigation. The data included appraisal or valuation information on 26 million homes in 36 states and the District of Columbia as of September 2005. The study also relied on loan-file data on almost 20 million active mortgages originated in 2004 and 2005. Some of the findings appear to support the stretched-to-thelimit, debt-bingeing image critics ascribe to today’s borrowers. • Almost 1 in 10 borrowers was in a zero- or negative-equity position as of September. Five percent were in negative territory by more than 10 percent.

• Almost 30 percent had equity cushions of less than 20 percent. Forty-four percent had less than a 30 percent cushion.

• State-by-state net equity holdings were sobering in some cases. More than 28 percent of Colorado buyers or refinancers had less than 5 percent equity in their properties. Almost 24 percent of Ohio owners were in the same situation.

Equity levels are important measures of household financial health and a key component of net worth. Low equity makes owners more vulnerable to economic shocks and rising interest rates. If they had to sell in a pinch, they could walk away with little or nothing. If property values declined even modestly, recent buyers with minimal equity stakes could slip to the negative side.

The First American study cites Federal Reserve research which found that, contrary to some critics’ assumptions, most of America’s homeowners have plenty of equity — 57 percent stakes on average as of the third quarter of 2005. Five years ago, the figure was about the same.

Not surprisingly, households’ equity positions vary by the age of their mortgages, among other factors. Eight out of 10 people who took out their mortgages in 1985 have equity stakes of 75 percent to 80 percent. Sixtyfive percent of borrowers whose loans date to 1990 have 50 percent to 55 percent equity positions. Roughly half of 2001 buyers and refinancers have seen their equity stakes grow to 25 percent to 30 percent.

By contrast, the most recent borrowers tend to be thin on equity because of high housing prices, low down payments, piggyback second-loan programs, and widespread use of interest-only and paymentoption plans that cut monthly payments dramatically but might add to principal debt. Almost 30 percent of 2005’s borrowers have zero to negative 5 percent equity positions.

Some — but not large numbers — of those low-equity homeowners who face hefty payment resets on interest-only and negative-amortization loans in the coming two to three years will end up in hot water, Cagan says.

But most will not.

If you have a low-equity mortgage that’s heading for a reset, plan ahead now. Make sure you have a financial-action strategy to handle what’s coming.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.