The latest mortgage report paints a picture of a hot housing market, which, at first glance, shows no signs of cooling.
2020 experienced the highest dollar amount of mortgage loan originations in U.S. history, passing the previous peak achieved in 2003 during the Millennium Boom. In total, just over $4 trillion in mortgage originations occurred during 2020, up significantly from roughly $2.4 trillion in 2019, according to the Urban Institute.
The difference demonstrates not just rapidly rising home values in 2020, but the rising popularity of refinances.
Fueled by historically-low interest rates and helped along by appraisal waivers, refinancing continues to be all the rage in 2021. Government-Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac back the majority of these originations, doubling their commitments in 2020. Meanwhile, private enterprises have limited their involvement in refinances, remaining cautious due to the ongoing recessionary environment. Further, in the first quarter (Q1) of 2021, refinances made up an increasing share of mortgage originations. Despite rising interest rates in Q1, refinances made up an estimated 68% of mortgage originations, up from 62% in Q4 2020.
Some good news for the housing market: after months of consistent increase, the total share of delinquent mortgaged homeowners finally showed improvement in Q1 2021. 6.4% of mortgage loans secured by a one-to-four residential unit are delinquent at the end of Q1 2021, down from 6.7% in Q4 2020, according to the Mortgage Bankers Association (MBA).
However, the majority of these loans are seriously delinquent, or 90+ days past due. The share of seriously delinquent mortgage continued to increase in Q1 2021, now at 4.7%.
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Mortgages are fueling the home price bubble
Anyone with even half an eye on the housing market can tell that it’s hot in 2021. Factors like ultra-low inventory, still-low interest rates and over a year of no foreclosures during the pandemic all continue to push competition — and home prices — to their limits.
Here in California, the statewide average annual change in home prices was +14% as of February 2021. Further, this price jump continues to build up momentum as buyers pile on in our current busy spring buying season, fear-of-missing-out a prime driving force.
Higher home prices axiomatically lead to higher mortgage amounts, evidenced by today’s record-breaking mortgage originations. On top of this, after a year of recession-related caution, lenders are gradually loosening mortgage standards, making it easier to qualify for a mortgage.
But one very big support for the housing market is still missing in 2021: a return of jobs lost during 2020.
At the end of Q1 2021, California is still missing 1.7 million or 9.3% of the jobs held prior to the start of the 2020 recession. In other words, 1.7 million Californians are still without income in 2021, unable to pay rent or make their mortgage payments.
For the past year, these jobless homeowners and renters have largely been able to remain in their homes due to federal protections. But with serious delinquency rates still rising in 2021, the coming expiration of the foreclosure moratorium has the appearance of a ticking time bomb.
The moratorium on evictions and foreclosures is currently scheduled to expire on June 30, 2021. When this happens, the building wave of delinquencies will become a tsunami, as those lacking good standing in a forbearance program will head immediately toward foreclosure or other forced sale. Today’s high levels of home equity will provide a cushion for the first delinquent homes eligible for foreclosure to trickle in, but a thin one.
Without a healthy jobs market, any growth experienced in home values is built on sand. Expect any disturbance to the factors propping up home prices — namely, the expiration of the foreclosure moratorium — to bring the whole house down.
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