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Negative Equity Gap Nears $4 trillion from Historical LTV Ratios

...The Fed Bank economist said it would take $3.7 trillion, to get homeowners with mortgage debt back to preferred loan-to-value ratio levels.

Emmons' data estimates the average LTV for those with mortgage debt is currently 94.3%.

That compares to preferred LTV levels among mortgage debt holders of 58.4%, which was the average struck among mortgaged homeowners in the period stretching from 1970 to 2005. “We are not talking about this very much … it's just too ugly.”

Emmons said the only viable option to narrow the gap is letting home prices fall until they eventually reach levels that entice buyers, bringing private capital back in.

At this point, home price appreciation would need to rise 62% to narrow the gap to the ideal LTV level, Emmons said.

With that in mind, the only alternative is that we have “millions of weak homeowners exit, replaced by new private owners with equity to recapitalize the housing sector.”

Emmons in his report said with the assumption that another 20% decline in national home prices is required to bring in new buyers, the amount of mortgage debt that must be eliminated then is $4.97 trillion, or 50% of current face value.

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