Tolerance and liquidity for the pandemic are running out. But everyone had a lot of fun.
By Wolf Richter for WOLF STREET.
Mortgage balances increased 9% in Q2 compared to a year ago, as prices went up year on year, while people bought far fewer homes: Existing home sales fell 10% compared to Q2 last year and sales of new single-family homes over the same period plummeted 19%.
Mortgage balances have risen steadily since the end of the housing crash in 2012. Over the past 10 years, mortgage balances have increased by $ 4.6 trillion, and over the past three years, mortgage balances have increased by $ 2.0 trillion , or 21%, to $ 11.4 trillion.
HELOCs end the long decline.
After 2009, credit lines for home bonds fell out of favor and balances fell steadily, easing the massive surge of the years before the financial crisis. As the Fed’s repression of interest rates and QE pushed mortgage rates down and as house prices soared, people started cashing in and refinancing their mortgages to generate cash rather than tap into cash. HELOC.
But now the decline is over. HELOC balances increased in the second quarter to $ 319 billion, from the previous quarter’s low. This occurred when mortgage rates rose and withdrawal credits plummeted.
Now a new dynamic is in place: Much Higher Mortgage Rates: It would be stupid to refinance a 3% mortgage with a 5% mortgage to withdraw $ 100,000 in cash from home. It is best to leave the 3% mortgage alone and get a $ 100,000 HELOC which charges 5% of the remaining balance, if any. So I expect HELOC balances to increase further in the future as the cash-out refi game has changed.
Mortgages are by far the largest part of consumer debt, bigger than ever.
Nothing even comes close. Second quarter consumer debt balances:
- Mortgages: $ 11.4 trillion
- Student Loans: $ 1.6 trillion
- Auto Loans: $ 1.5 trillion
- Credit cards: $ 890 billion
- “Other” (personal loans, etc.): $ 470 billion
- HELOC: $ 320 billion.
Mortgages are where the big systemic risks are used to be due to the size of the market and high leverage.
But now, commercial banks in the United States only hold about $ 2.4 trillion of residential mortgages, including HELOCs, on their balance sheets, and those are spread across 4,300 commercial banks. Thousands of credit unions and other lenders also hold some mortgages on their balance sheets.
But most mortgages are now securitized into mortgage-backed securities. MBS are divided into two categories:
- Most are government-backed MBSs. This is where the taxpayer is engaged, not investors and lenders.
- A smaller portion of MBS are “private labels” – not backed by government agencies. They are held by global bond funds, pension funds, insurance companies, etc.
The delinquencies begin the journey back to reality. Everyone had a great time.
As part of the pandemic-era tolerance programs, homeowners who fell behind on mortgage payments, or who stopped paying mortgages altogether, and then entered a tolerance program, were reclassified as “current” instead of delinquents. They didn’t have to pay the mortgage and could use the money saved from those unpaid mortgage payments for other things. Eventually, they would have to make a deal with the lender to get out of the forbearance program.
The spike in house prices since the spring of 2020 has allowed homeowners, when the time has come to get out of the forbearance program, to sell the house and pay the mortgage and leave with extra money; or come up with an agreement with the lender, such as a modified mortgage with a longer term, lower rate, and lower payments. And everyone had a lot of fun.
But with the end of the grant programs, mortgage defaults have started to rise from last year’s all-time lows this year.
Mortgage balances that were 30 days or more in default rose to 1.9% of total mortgage balances in the second quarter, compared to 1.7% in the first quarter. It was the third consecutive quarter-to-quarter increase, from an all-time low in the second quarter of 2021. But it remains below all pre-pandemic lows (red line).
HELOC balances that were 30 days or more in default rose to 2.3% of total HELOC balances, the fourth consecutive quarter-to-quarter increase, from a record low in the second quarter of 2021. They are now higher than they were before the housing crash ( green line).
The HELOC default rate in the second quarter was for the first time ever higher than the mortgage default rate, which makes you go mmm.
Foreclosures have risen, but are still close to all-time lows.
The number of consumers with foreclosures rose to 35,120 borrowers, from 24,240 in the first quarter and from a record low of 8,100 to 9,600 last year.
Foreclosures are still far below previous lows before the pandemic. At its lowest point in the second quarter of 2005, during the Best of Times just before Housing Bust took off, there were 148,780 foreclosures, more than four times as many as now.
By comparison, during the three-year period from 2008 to 2011, the peak of the mortgage crisis, more than 400,000 consumers per quarter suffered foreclosures, of which 566,180 at the peak in the second quarter of 2009.
During the best period before the housing collapse, some 150,000 consumers suffered foreclosures; and during the good old days before the pandemic, about 75,000 consumers had foreclosures every quarter. This range of 75,000 to 150,000 foreclosures could represent something like the old Good Times Normal (blue box), and we’re not there yet:
Home prices and foreclosures.
An increase in foreclosures cannot occur unless there is a collapse in house prices. When a homeowner who bought the house two years ago for $ 400,000 gets into trouble now, when the house price jumped 25% to $ 500,000, he can simply sell the house, pay the mortgage, pay taxes and leave with leftover money. And there will be no foreclosure.
If the price of that home eventually drops 25% to $ 375,000 and the borrower owes $ 390,000 on the mortgage, the exit becomes more difficult.
If the price drops 40% to $ 300,000, the easy exit is closed. That’s when foreclosures are starting to occur in large numbers, especially if they are accompanied by a large-scale rise in unemployment, and that’s what happened during the mortgage crisis. But it’s not on the table yet.
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