Patience and epidemic money run out. But a lot of fun was enjoyed by everyone.
by Wolf Richter for Wolf Street.
Mortgage balances jumped 9% in the second quarter of last year, as prices rose year-on-year while people bought significantly fewer homes – Existing home sales down 10% From the second quarter last year, the Sales of new single-family homes fell 19% during the same period.
Mortgage balances have risen relentlessly since the end of the housing crisis in 2012. Over those 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 reach $11.4 trillion.
HELOCs are ending a long period of regression.
Lines of credit for real estate stocks fell out of favor after 2009 and balances steadily declined, exacerbating the massive rally in the years leading up to the financial crisis. With the Federal Reserve cracking down on interest rates and quantitative easing lowering mortgage rates, and with home prices rising, people began to refinance their mortgages to generate cash, rather than relying on HELOCs.
But now the retreat is over. HELOC balances rose in the second quarter to $319 billion, from the lowest level in the previous quarter. This happened as Mortgage rates have gone up, cash reference has also gone down.
There’s now a new dynamic in place: Mortgage rates are much higher: It would be foolish to refinance a 3% mortgage with a 5% mortgage to withdraw $100,000 in cash from the house. It’s best to leave the 3% mortgage alone, and have a $100,000 HELOC that charges 5% of the outstanding balance, if any. So I expect HELOC balances to go up even more in the future because the cash back game has changed.
Mortgages are by far the largest portion of consumer debt, and they are larger than ever.
Nothing even comes close. Consumer Debt Balances in the Second Quarter:
- Mortgages: $11.4 trillion
- Student loans: $1.6 trillion
- Auto Loans: $1.5 Trillion
- Credit Cards: $890 billion
- “Other” (personal loans, etc.): $470 billion
- Hilux: $320 billion.
Mortgages where the systemic risk is high used to be Because of the sheer size of the market and the high leverage.
But now, US commercial banks have only about $2.4 trillion worth of residential mortgages, including HELOCs, on their balance sheets, and those are distributed among 4,300 commercial banks. Thousands of credit unions and other lenders have some mortgages on their balance sheets.
But most mortgages are now converted into mortgage-backed securities. Mohammed bin Salman is divided into two categories:
- Most of them are backed by the government, Mohammed bin Salman. Here the taxpayer is in trouble, not the investors and lenders.
- A smaller portion of MBS is “private label” – not supported by government bodies. It is held by global bond funds, pension funds, insurance companies, etc.
Delinquency begins a journey back to reality. Everyone was having so much fun.
Under pandemic-era forbearance programs, homeowners who defaulted on their mortgage payments, or stopped paying their mortgages entirely, and then entered the forbearance program, have been reclassified to “current” rather than delinquent. They didn’t have to make their mortgage payments, and they could use the cash saved from mortgage payments that weren’t made for other things. Eventually, they will have to strike a deal with the lender to get out of the patience program.
The sharp rise in home prices since spring 2020 has allowed homeowners, when it was time to exit the patience program, to either sell the home, pay off the mortgage and walk away with extra cash; Or make a deal with a lender, such as a mortgage with a longer term, lower rate, and lower payments. And everyone was having a lot of fun.
But with patience programs ending, mortgage defaults have begun to rise this year from record lows last year.
Mortgage Balances That was 30 days or more past due to 1.9% of total mortgage balances in the second quarter, up from 1.7% in the first. This was the third quarter-to-quarter increase in a row, from a record low in the second quarter of 2021. But it’s still below all pre-pandemic lows (red line).
HELOC balances That was 30 days or more past due 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. It is now higher than it was before the housing crash (green) Line).
The HELOC delinquency rate in the second quarter was higher than the mortgage default rate for the first time ever, making you go nations.
Foreclosures are up, but are still close to record lows.
The number of consumers foreclosed on rose to 35,120 borrowers, up from 24,240 in the first quarter and up from the record low range of 8,100 to 9,600 last year.
Foreclosures are still much lower than any previous declines before the pandemic. At the lowest point in the second quarter of 2005, during the best of times before the housing crisis hit, there were 148,780 foreclosures, more than four times As many as possible now.
For comparison, during the three-year period from 2008 through 2011, the height of the mortgage crisis, more than 400,000 consumers each quarter had foreclosures, including 566,180 at the peak in the second quarter of 2009.
During the best of times before the housing crisis, about 150,000 consumers were subjected to foreclosure; And during the good times before the pandemic, about 75,000 consumers had foreclosures every three months. This range of 75,000 to 150,000 foreclosures might represent something like the old Good Times Normal (the blue box), and we still haven’t quite gotten to that yet:
Home prices and foreclosures.
An increase in foreclosures cannot occur unless there is a fall in home prices. When a homeowner who bought the house two years ago for $400,000 has a problem now, when the home price has jumped 25% to $500,000, he can just sell the house, pay off the mortgage, pay the fees, and leave with the rest of the cash. 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, that exit gets tougher.
If the price drops 40% to $300,000, the easy exit will be closed. This is when foreclosures began to occur in large numbers, especially if they were accompanied by a spike in unemployment, which is what happened during the mortgage crisis. But that is not on the table yet.
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