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What Can Cause The Next Mortgage Crisis In The U.S.?

Delinquency rates started surging after home prices started falling. By 2008, some homeowners were seriously "underwater" - they owed more on their house than the house was worth. But home prices are an indicator of default risk. The New York Fed: Over the first half of the 2000s, U.S. household debt, particularly mortgage debt, rose rapidly along with house prices, leaving consumers very vulnerable to house price declines. Homeowners in the sand states were much less levered in 2005 than those in other regions, yet as home prices reverted to their mean, the leverage of these homeowners rapidly increased and extremely high mortgage defaults followed. In fact, according to research cited by the paper, negative equity is a "necessary condition" for mortgage default: Negative-equity loans represent a pool of default risks: If the borrowers are hit with liquidity shocks resulting from, say, a lost job, then default may be the only viable option. Positive-equity borrowers faced with liquidity shocks, on the other hand, are generally able to sell the property and avoid default. It all boils down to this: There can be no mortgage crisis unless home prices decline enough in some markets. And given how inflated home prices are in many markets, and that mortgage rates are now climbing, any reversion toward the mean of home prices in those markets would cause the delinquency rate to do a beautiful "déjà-vu all over again," so to speak. That low national delinquency rate these days, often touted as a sign of low risk in the housing market, has zero meaning as an indicator of risk for the most vulnerable households when the prices of their homes begin to drop.