Cash-out refis help drive pandemic-era mortgage boom

A fuller picture of the factors that drove the great U.S. mortgage boom of 2020 is starting to emerge.

The homebuyers who took advantage of rock-bottom mortgage rates during the pandemic included many investors and purchasers of second homes who flocked to the market at levels unseen since before the Great Recession, according to new data from the Federal Reserve Bank of New York.

Cash-out refinancings also hit a post-financial-crisis high, as many households tapped into the equity they have accumulated as home prices have climbed over the last decade. Mortgage origination volume last year totaled $3.7 trillion, by far the highest level since 2003.

The data is most notable for one major contrast that it reveals between the current boom and the previous one: borrowers’ creditworthiness. Last year, roughly 70% of mortgage borrowers had credit scores of 760 or higher, compared with around 30% in 2003.

The 40-percentage-point gap is a reflection of both lenders’ reluctance to extend credit to borrowers with subpar credit and prime borrowers’ confidence in their ability to handle more debt. During the subprime lending boom, many borrowers with little equity took on more debt than they could afford.

“Researchers have concluded that the 2003 refi boom had long-running consequences, contributing to over-leveraged balance sheets as home prices fell,” experts at New York Fed noted in a blog post published Wednesday.

During the fourth quarter, total U.S. household debt outstanding hit an all-time high of $14.56 trillion, according to the report, which was based on a sample of credit data from Equifax.

Many Americans are eschewing public transit for cars during the pandemic, contributing to a boom in auto lending. Car loan originations of $616 billion in 2020 marked a record high.

Credit cards are one consumer lending segment where balances have sharply declined in recent quarters, as banks have tightened their lending criteria and many households have used increased savings and government benefits to pay down existing debt.

Card debt as a share of disposable income fell from around 5.5% to roughly 4.5% in the early months of the pandemic, according to a recent report by the American Bankers Association.

During the fourth quarter, credit card debt outstanding totaled $820 million, down $108 million from the same period a year earlier, the New York Fed found.

The spike in mortgage originations in 2020 was driven mostly by refinancing activity, but loans for home purchases also rose significantly, likely contributing to the recent increase in U.S. home prices. A national index of home prices developed by economists Karl Case and Robert Shiller rose by 9.5% between November 2019 and the same month last year.

In addition to investors, first-time homebuyers also helped fuel demand for mortgages. This group lagged behind repeat purchasers during much of the last decade but has recently caught up, according to the New York Fed’s data.

Still, young adults make up a relatively small portion of the market. In the fourth quarter of last year, adults ages 18 to 29 accounted for 7% of all mortgage originations, down from 11% in the third quarter of 2018, but still up from the low-water mark of 4% in the first quarter of 2013.

While U.S. homeowners withdrew $182 billion in equity last year, the comparable figures from 2003 to 2006 were higher, even without adjusting for inflation, according to the New York Fed researchers. The average amount withdrawn by a homeowner was also significantly lower in 2020 than it had been in 2019.

“The median cashout withdrawal in 2020 was only $6,700,” the researchers wrote, “suggesting that at least half of the refinancers borrowed only enough additional funds to cover the closing costs on the new mortgage.”


Housing, civil rights groups ask Congress for $25B

A large partnership of housing and civil rights organizations reached out on Monday to congressional leaders advocating for further relief for homeowners in the next COVID-19 stimulus package.  

The letter was signed by representatives of more than 350 housing and civil rights organizations, including American Bankers Association, Mortgage Bankers Association, National Association of Realtors, National Association of Home Builders and the Housing Policy Council, the NAACP, National Urban League, National Fair Housing Alliance and National Consumer Law Center.

The letter calls for $25 billion in direct assistance to homeowners facing hardships as a result of the COVID-19 pandemic, at least $100 million for housing counseling, and just under $40 million for the Fair Housing Initiatives Program.

Of the approximately 3.8 million homeowners past due on their mortgages, over half of them are persons of color, according to Census Bureau.

Recent homebuyers that relied on low- or no-down payment loans from FHA, VA or the Rural Housing Service are at particular risk, the group contends, noting that even six months of forbearance can put borrowers underwater on their mortgages, owing more than their home is worth.

“Moreover, these borrowers are predominantly Black and Latinx families, first-time buyers and low to moderate-income families,” the letter says. “Mortgage payments assistance will be critically important to the nearly 3 million borrowers that remain in long-term forbearance plans from their mortgage servicers. We cannot begin to tackle the racial homeownership and wealth gaps if we do not take steps to prevent a wave of COVID-induced foreclosures and loss of home equity.”

The group is hoping the bulk of the requested $25 billion comes through the recently reintroduced Homeowner Assistance Fund, which can be used by state housing finance agencies. In the letter to Congress, the group states that the HAF can help homeowners by providing direct assistance with mortgage payments and get into affordable loan modifications, while assisting with utility payments, property tax and insurance payments, homeowner association dues and other support to prevent the loss of home equity.

The outreach from housing and civil rights groups comes at a pivotal time for the American housing industry. Recently appointed Treasury Secretary Janet Yellen has said she will play a key role in pushing the Biden administration’s economic agenda on Capitol Hill – which includes aggressive aid distribution in order to avoid an even longer recession.

President Joe Biden has repeatedly said his administration is focused on providing aid for those in need of affordable housing, and his $1.9 trillion American Rescue Plan was recently voted into the budget reconciliation process in order to speed up passage. The plan calls for an additional $30 billion in funding for emergency rental, energy and water assistance for hard-hit households, plus $5 billion in emergency assistance to people experiencing or at risk of homelessness.

All of this at a time in the country where Black homeownership has declined year-over-year, according to a recent Census Bureau report, and the percentage of Americans experiencing housing insecurity has risen to 9.5% – up from 7.2% in late 2020.

“A critical lesson of the Great Recession is that the communities most impacted need targeted, early intervention,” the group wrote in the letter. “Acting now to include these key provisions in the pending COVID-19 relief package will help stem what could be a damaging housing crisis in the U.S. concentrated in low income communities and communities of color.”