You know what the mortgage crisis needed more of? Adjustable-rate mortgages.
Yep, we needed more loans with variable interest rates to both avoid such a disastrous downturn and recovery more quickly.
Allow me to explain. James J. McAndrews, executive vice president and head of the Research and Statistics Group at the Federal Reserve Bank of New York, delivered the opening remarks during a panel about mortgage contract design last week.
ARMs May Not Require Any Work
While most probably think of ARMs as a lot of work and stress
They can actually adjust with the economy
So you don’t necessarily need to do anything
Assuming economic conditions are favorable and rates fall over time
His angle was an interesting one, strikingly contrarian to the common belief that a fixed-rate mortgage is the smartest and only choice to avoid another housing meltdown.
The basic premise is that ARMs naturally rise and fall with the economy, and thus any necessary interest rate adjustment can come with little action on behalf of the borrower or a government entity.
So had everyone had ARMs prior to the mortgage crisis, they wouldn’t have needed to refinance via HARP or get a loan modification through HAMP.
Instead, accommodative monetary policy would have pushed interest rates on ARMs lower automatically.
After all, look at the mortgage indexes tied to ARMs, such as LIBOR, that are a fraction of a percent. Coupled with the margin on an ARM, the fully indexed rate would be very low today.
In fact, borrowers who never refinanced their ARMs could be enjoying rates in the 2-3% range month after month, all because of macroeconomic trends and Fed policy.
These borrowers would also have saved money by avoiding a refinance, which McAndrews said could cost the average borrower about $2,000 plus one percent of the loan amount.
And their loans would still be on course to be paid off when originally taken out because the term would be unchanged.
In other words, many homeowners would be about halfway through their 30-year terms right now.
More importantly, many of these borrowers would be enjoying these low rates regardless of whether they had equity because there are no LTV constraints involved with a variable rate mortgage.
Conversely, without programs like HARP and the FHA streamline refinance, many borrowers would have been stuck with their higher-rate fixed mortgages because refinancing wouldn’t be an option.
Borrowers Stuck in Fixed Mortgages
Fixed mortgages generally seem like a no-brainer
No matter what the economic climate
A lot of borrowers got stuck with high-rate fixed mortgages
Thanks to negative equity, while ARM borrowers enjoyed lower rates
McAndrews went on to argue that fixed-rate features limited the benefits of accommodative monetary policy by the Fed because borrowers continued to pay their higher-rate mortgages.
This is evidenced in the following chart, which shows rates on outstanding mortgage loans for fixed mortgages vs. ARMs.
As you can see, the interest rates on ARMs declined much more rapidly and fell lower than the rates on fixed mortgages.
And this happened despite the fact that many ARMs are hybrids, where the first three or five years are fixed before becoming adjustable based on associated indexes.
So borrowers with fixed mortgages continued to overpay each month, despite action by the Fed.
This is important because research by the Fed has shown that these lower payments resulted in significant declines in these homeowners’ default probabilities. And there’s evidence that these borrowers increased their consumption.
In other words, the Fed could have saved all these borrowers lots of money and got the economy humming again a lot faster without the need for complex and pricey mortgage help programs like HARP and HAMP.
And $100 billion or so wouldn’t have needed to be spent on refinancing from 2008 through 2013, not that the mortgage industry is complaining.
The Reality of the Situation
While the basic premise makes sense
Assuming interest rates don’t rise a ton over a long period
ARMs can also get homeowners into a lot of trouble
Make sure you can afford payments no matter what happens in the future
It’s clear that McAndrews favors ARMs, or at least sees their grand potential. But in reality, a lot of homeowners got stuck with some really questionable ARMs at the height of the housing boom.
In fact, many of the loans weren’t even affordable at origination, and there was little evidence to predict they would be later on.
I don’t know if anyone expected the associated indexes to plummet as they have, resulting in rock bottom mortgage rates for the lucky borrowers who stuck with their ARMs.
My guess is that most expected interest rates to worsen, putting these borrowers in an impossible position, especially since many used stated income to qualify.
Going forward, you could make a stronger argument for ARMs, seeing that borrowers are actually qualified using full documentation nowadays.
But then you have to contend with the fact that fixed mortgages are near all-time lows, making them extremely attractive as well.
While it’s true that the central bank could have helped borrowers with ARMs in a faster and more direct manner, it might be better to question why they needed help to begin with.
If it weren’t for those shoddy ARMs that artificially increased affordability and allowed home prices to swell and swell to unreasonable levels, maybe I wouldn’t be writing this post.
In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family rentals in transitional areas of the city) to catch a bid while single-family rentals in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.
This story was originally featured on Fortune.com
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The continuous development of loss mitigation tools and practices in the mortgage industry will play an essential part in preventing future foreclosures, but additional safety nets — particularly for those mortgage customers who belong to historically disadvantaged populations — will play a critical role in thinning the racial wealth gap. One such tool rests with mortgage reserve accounts (MRAs).
This is according to a report published late last month by the Urban Institute, funded by the Federal Home Loan Bank of San Francisco.
“Borrowers who have more liquid assets to fall back on are better able to sustain homeownership when they face temporary financial setbacks,” the report said. “Helping less affluent borrowers establish mortgage reserve accounts (MRAs) — ‘sidecar’ savings accounts that can be tapped to weather a financial shock — are one promising solution.”
There are a lot of questions that arise from the use of such tools including those surrounding implementation, achieving scale and making mortgage outcomes more equitable, the report says. With MRAs, however, variations on the concept “are under early-stage development by retail mortgage lenders and the secondary market actors Fannie Mae and Freddie Mac,” the report explained.
MRAs account for only one such tool that could impact the foreclosure rate among homeowners of color, as other approaches — including those in the insurance space — could be scaled to meet the needs of potential beneficiaries.
“Whatever the approach, if the foreclosure rate for Black mortgage borrowers decreased to the average foreclosure rate among white mortgage borrowers, an estimated 300,000 more Black homeowners would keep their homes and have the opportunity to build generational wealth,” the report explained. “Additionally, making mortgages less risky for lenders, insurers, and investors, in addition to families, should lead to an expansion of the credit box and allow even more households with modest incomes and resources to access and realize the benefits of homeownership.”
While several new loss mitigation tools have been developed in recent years, particularly in response to the economic shock caused by natural disasters in 2017-18 and the COVID-19 pandemic for many mortgage borrowers, there are “limited solutions that target the triggers of default and help Black homeowners avoid missing their mortgage payments in the first place,” the report said. “Research has shown that having financial reserves can help households avoid default.”
In comparison to other alternatives, MRAs are a viable option for preserving homeownership among vulnerable homeowners due to a unique combination of product features and flexibility, the report explained.
“Mortgage reserves do not necessarily require a subsidy, nor do they increase the costs of homeownership because they can be financed with money that would otherwise go toward the borrower’s down payment,” the report said. “Additionally, mortgage reserves can add substantial flexibility to a borrower’s finances, as the borrower’s residual income can cover a nonmortgage expense at the time it is incurred, while the reserve fund covers the mortgage.”
Real estate transactions topped $13 billion in value in the first half of this year, with a plurality of the sales concentrated within the top income bracket encompassing the luxury market, data provided by Realtors Association of Jamaica shows.
However, the data, which spanned four income groupings, also shows that once combined, the majority of the sales are within the middle- to high-income block.
In that regard, the data comports with information from members of the banking sector, several of which have said that for them, the demand for home loans is manifested mostly in the middle tier of the market.
But while the banks have said business is fairly robust notwithstanding the uptick in mortgage rates, the data from the RAJ Multiple Listing Service indicates that residential real estate transactions are on the decline.
For all of 2022, the Realtors Association reported that there were 1,608 transactions worth nearly $108 billion spanning the four categories of residential real estate. But that is down from 1,858 transactions valued at $211 billion the previous year.
According to real estate brokers and financiers of home purchases, the current functional definition of middle-income residences relates to homes priced within the $15 million to $25 million range, while high-income residences are priced at $25 million to $45 million.
Most of the demand was said by different banks to be coming from young professionals.
The Realtors Association’s listing service captured 287 real estate transactions from January to June of this year, valued at $13.27 billion.
Broken down into four categories, the most lucrative side of the market and the area with the highest demand related to the most expensive homes.
In the under-$15 million category, RAJ reported that there were 76 transactions valued at $731 million at half-year 2023; in the middle income or $15 million to $25 million band, there were 68 deals valued at $5.2 billion; for those in the $25 million to $35 million range, there were 49 transactions valued at nearly $1.44 billion; while at the top end of the spectrum, for residences costing over $35 million, there were 94 transactions valued at $5.89 billion.
CIBC First Caribbean Jamaica, which once operated a building society but merged it into its wider operations years ago, said the bank has seen a 28 per cent increase in the number of applications for mortgages in the first five months of 2023, relative to last year, and consequently, it has been distributing more home loans in line with demand.
“Approval percentages for the corresponding periods during 2022 and 2023 were 73.33 per cent and 82.46 per cent, respectively,” CIBC FirstCaribbean said regarding the performance of the mortgage market.
And that is within a context where financing charges are 0.5 percentage point higher than last year, the bank said. The loan applications it received mostly related to apartments and single-home properties.
The most recent data published by the Bank of Jamaica, BOJ, shows that after a yearlong period of steady then incrementally small movements, mortgage loan rates have spiked to a three-year high, at 7.76 per cent as of May. That is up 56 basis points since January when mortgage loans were priced at an average of 7.2 per cent.
JMMB Bank says most of the demand for its home loans relates to properties falling within a band of $14 million to $35 million.
“This segment largely consists of young professionals who are first time homeowners taking advantage of the increased NHT loan ceiling which stood at $6.5 million since 2019 and is set to increase to $7.5 million, per single applicant in July 2023,” JMMB Bank’s General Manager of Bank Client Partnership Moya Leiba-Barnes, told the Financial Gleaner back in June. The NHT has since announced the increase in the loan ceiling, effective July 1.
Partnership agreements
“In response to the demand in this segment, JMMB Bank has forged several partnership agreements with developers, some of whom have received financing for their construction projects through JMMB Bank, in keeping with its end-to-end financing of real estate projects,” said Leiba-Barnes.
In May, JMMB Bank adjusted all its variable interest rate loans, including residential mortgages, by up to 1.75 per cent for retail clients, in response to the series of interest rate hikes that the central bank had executed for more than a year. The central bank’s policy rate has rested at 7.0 per cent since last November, but it is coming from a historic low of 0.5 per cent nearly two years ago when the BOJ shifted towards monetary tightening as a check on inflation.
Financing for majority mid-income properties is reflective of recent trends. The central bank, in a review of the mortgage market published in the latest BOJ Financial Stability Report, said acquisition of houses and apartments were mainly financed by banking institutions, inclusive of banks and mortgage banks, and spanned properties priced mainly in the range of $15 million to $30 million, during the period April 2019 to March 2021.
There were also outlier purchases of properties in excess of $60 million, which were spread across all institutions, “suggesting low concentration in high-value real estate,” the central bank stated.
Across all price ranges, the greater share of loan funding was for the purchase of houses, inclusive of apartments priced mainly at $15 million to $30 million, and scheme residences priced below $15 million.
“This was consistent with the affordable housing solutions established in the parish of St Catherine and indicative of joint financing arrangements with other institutions namely the National Housing Trust,” the central bank said.
It added that notwithstanding the spike in mortgage activity, the banks appeared to have a fairly good handle on managing the risk. Since mid-2020, the central bank said that asset quality improved sharply relative to the overall loan portfolio of banking institutions while credit quality was high, with the level of ‘performing’ mortgage loans at March 2022 estimated at 93 per cent of mortgage portfolios.
Troubled bank and mortgage lender BankUnited was shut down today by the Office of Thrift Supervision and placed into FDIC receivership.
It was the 34th bank failure of 2009 and the third in the state of Florida so far this year.
The failure didn’t come as much of a surprise, as it was widely known that BankUnited was on its last legs and searching for a buyer for the last several months.
Back in early August, BankUnited launched its so-called “Mortgage Assistance Program” to help scores of borrowers refinance out of troublesome option arms, which were popular at the bank.
A month later, the OTS reclassified the bank as “adequately capitalized” and demanded that it terminate its option arm loan program and raise at least $400 million in capital.
Clearly it was unable to do so, and no buyers seemed to step up to the plate to save the struggling bank; instead, the FDIC facilitated a sale to a number of well known private equity firms, including WL Ross & Co. and Blackstone Capital.
All deposit accounts, mortgages, and other loans, excluding some brokered deposits, have been moved to a new federally chartered savings bank with the same name, “BankUnited,” backed by $900 million in fresh capital.
The new bank, with its 86 branches, will be the largest independent bank in Florida, just like its predecessor.
As of May 2, the thrift had $12.8 billion in assets and deposits of $8.6 billion; the FDIC has agreed to share losses on approximately $10.7 billion in assets under a loss-sharing agreement.
The FDIC estimated that the failure will cost $4.9 billion, hitting its dwindling Deposit Insurance Fund, which fell to just $19 billion as of the end of the fourth quarter (who knows how low it is now).
Shares of BankUnited closed the day down five cents, or 8.57%, to a mere 49 cents.
The so-called TILA RESPA Integrated Disclosure rule, also known as TRID for short, or Know Before You Owe, was expected to go live on August 1st of this year.
But due to an “administrative error” discovered by the Consumer Financial Protection Bureau (CFPB) at seemingly the eleventh hour, the implementation will be delayed two months and instead be rolled out on October 1st.
Those in the industry will probably be relieved, though not without pointing to the double standard the CFPB (the agency behind the new forms) seems to enjoy. Imagine if lenders complied two months late…
The error would have only delayed the effective date of TRID by two weeks, but the CFPB felt pushing the date back even further would benefit consumers and mortgage providers’ families who are expected to be busy dealing with a new school year in August.
The news came as a bit of a surprise seeing that vendors and mortgage lenders had been pushing for a delay to the new disclosures for months.
It almost appears as if the CFPB finally caved to public pressure, though apparently it’s a real federal law that barred them from moving ahead as originally planned.
What Is TRID?
If you’ve heard the acronym TRID recently, you might be wondering what the heck it is. As mentioned, it stands for TILA RESPA Integrated Disclosure rule.
Further broken down, it amounts to Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure rule. Quite a mouthful I know.
It essentially consolidates four existing disclosures (Truth in Lending forms, GFE, HUD-1) into two new disclosure forms known as the Loan Estimate and Closing Disclosure.
It’s a big deal because the current disclosures have been in use around for about 40 years.
The Loan Estimate, or LE, which contains details such as loan term and projected payment, must be put in the mail and sent to consumers who apply for mortgages no later than the third business day after receiving their application.
For the record, an application is triggered when the lender receives six key pieces of information, including:
[checklist]
Consumer’s name
Consumer’s income
Consumers SSN (to obtain a credit report)
Property address
Estimated property value
Loan amount
[/checklist]
The Loan Estimate must also be placed in the mail no later than the seventh business day before consummation of the transaction.
And it expires 10 business days after it is provided if the consumer does not indicate that they wish to proceed.
The Closing Disclosure, or CD, which details all closing costs and the total payments and finance charges associated with the mortgage, must be provided to the consumer at least three business days prior to loan consummation.
Consummation generally means when the borrower signs loan documents, though this can vary by state.
And if certain changes occur, such as an interest rate increase (APR rises 1/8 for fixed loans or ¼ for ARMs), a prepayment penalty is added, or the borrower switches loan programs, a new three-day waiting period is triggered.
Why TRID?
This new waiting period kind of echoes the existing right of rescission that is in place for most refinance transactions.
Put simply, it gives would-be home buyers a cooling off period to review their loan costs and details before moving forward and signing. As opposed to signing on the spot and feeling rushed or confused.
Additionally, the LE and CD are of the same cloth so borrowers will have an easier time comparing estimated costs and final costs, instead of getting lost in paperwork that looks completely different.
This should help borrowers better understand what they’re being charged and why, and also reduce the chances of getting ripped off.
However, some industry participants worry this could delay loan closings and possibly result in the need for longer lock periods and/or lock extensions, which could ultimately cost consumers.
But lenders can adjust accordingly in order to keep loan closings expeditious. Hopefully they’ll be forced to become more efficient and provide more accurate estimates upfront.
In any case, lenders now have two more months to figure it all out, and in the meantime borrowers will continue to see the old forms.
Lastly, it should be noted that TRID does not apply to HELOCs, reverse mortgages, or mortgage secured by a mobile home (or those not attached to real property).
Millions of homeowners across the country lost their homes in the foreclosure crisis, missing out on the opportunity to regain and grow their net wealth as the housing market recovered. But in black and Hispanic communities, the foreclosure crisis hit especially hard, and homes in those areas have yet to fully recover, according to a new Zillow analysis.
When the housing market crashed, many homes lost a significant share of their value, especially among homes that were ultimately foreclosed. In Hispanic and black communities, foreclosed home values fell by more than 50 percent.
As the market recovered and home values rebounded, foreclosed homes saw strong appreciation –equity growth that the former owners couldn’t access. Foreclosed homes in black and Hispanic communities have more than doubled in value since reaching their lowest point, though they remain 4.7 percent and 9.5 percent below their peaks.
Not only did the foreclosure crisis have a sharper impact on people’s ability to gain wealth in black and Hispanic communities, it also had a broader reach into those areas. Nationally, 19.4 percent of all foreclosures between 2007 and 2015 were in Hispanic communities – but only 9.6 percent of homes are in those same areas. Similarly, 12.7 percent of foreclosures occurred in black communities, while 7.7 percent of all homes are in black communities.
In Atlanta, 30.5 percent of all homes are in black communities, but more than half of all foreclosed homes are in those communities. Just 44.2 percent of foreclosed Atlanta homes are in white communities, compared with the overall 65.1 percent of homes in white communities.
Losing a home to foreclosure is especially impactful for Hispanic and black homeowners, who historically have held the majority of their net worth in their homes. Near the height of the housing bubble in 2007, Hispanic and black homeowners had 73.1 percent and 61.8 percent of their net worth tied up in their homes. For white homeowners, that number was only 46.5 percent.
“The housing bust and foreclosure crisis that followed resulted in a disproportionate number of people of color losing not only the roof over their heads, but the wealth—and the opportunity to potentially build more—that came with it,” said Zillow Senior Economist Sarah Mikhitarian. “Black and Hispanic homeowners were more exposed to the foreclosure crisis because homes accounted for such a large share of their wealth. With fewer assets to draw on, it was harder for them to hold onto their homes if they fell underwater on their mortgages, owing more than their home was worth. For people who ultimately succumbed to foreclosure, they missed out on the opportunity to see their home’s equity—and therefore their wealth—climb back up.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Mortgage applications dropped for the second straight week, this time down 4% for the week ending May 28, 2021, according to the Mortgage Bankers Association‘s weekly mortgage applications survey.
This week’s data was compared to mortgage applications from the week of Memorial Day in 2020.
The overall housing index hit its lowest point since February, said Joel Kan, MBA’s associate vice president of economic and industry forecasting.
“Tight housing inventory, obstacles to a faster rate of new construction, and rapidly rising home prices continue to hold back purchase activity,” Kan said. “The government purchase index declined to its lowest level in over a year and has now decreased year over year for five straight weeks. Purchase applications were down almost 2% from a year ago, but that was compared to the week of Memorial Day 2020.”
Kan added that refinance activity dropped for the second straight week, even as the 30-year fixed rate decreased slightly to 3.17%.
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“Even though rates have been below 3.2% over the past month, they are still around 20 to 30 basis points higher than the record lows in late 2020,” he said.
The refinance share of activity decreased to 61.3% of total mortgage applications from 61.4% the previous week. The FHA share of total mortgage applications increased to 9.6% from 9.1% the week prior, but the VA share of total mortgage applications decreased to 10.9% from 11.2%.
Here is a more detailed breakdown of this week’s applications data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) decreased to 3.17% from 3.18%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) increased to 3.34% from 3.30%
The average contract interest rate for 30-year fixed-rate mortgages decreased to 3.16% from 3.2%
The average contract interest rate for 15-year fixed-rate mortgages increased to 2.56% from 2.53%
The average contract interest rate for 5/1 ARMs decreased to 2.54% from 2.81%, with points remaining unchanged at 0.29 (including the origination fee) for 80% LTV loans.
Correction: An earlier version of this story incorrectly said the average interest rate for ARMs increased, when it decreased.
For the third week in a row, mortgage applications decreased.
Mortgage applications fell 3.1% in the week ending June 4, and refis took the biggest dip, according to the latest report from the Mortgage Bankers Association.
“Most of the decline in mortgage rates came late last week, with the 30-year fixed-rate mortgage declining to 3.15 percent,” said Joel Kan, the MBA’s vice president of economic and industry forecasting. “This likely impacted refinance applications, which fell 5% for both conventional and government loans. But purchase applications were up slightly last week, and the large annual decline was the result of Memorial Day 2021 being compared to a non-holiday week, as well as the big upswing in applications seen last May once pandemic-induced lockdowns started to lift.”
Compared to last year, fewer people are applying for purchase mortgages, the MBA reported, as home prices continue to rise and prospective buyers avoid astronomical bidding wars. Demand is still strong overall, especially in certain markets in the South and West.
“Housing demand is still far outpacing supply,” Kan said. “The average loan size on a purchase application edged down to $407,000, below the record $418,000 set in February — but still far above 2020’s average of $353,900.”
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The refinance share of activity decreased to 60.4% of total mortgage applications from 61.3% the previous week. The FHA share of total mortgage applications decreased to 9.5% from 9.6% the week prior, but the VA share of total mortgage applications increased to 11.2% from 10.9%.
Here is a more detailed breakdown of this week’s applications data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) decreased to 3.15% from 3.17%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) decreased to 3.29% from 3.34%
The average contract interest rate for 30-year fixed-rate mortgages decreased to 3.12% from 3.16%
The average contract interest rate for 15-year fixed-rate mortgages decreased to 2.52% from 2.56%
The average contract interest rate for 5/1 ARMs decreased to 2.54% from 2.81%, with points increasing to 0.39 from 0.29 (including the origination fee) for 80% LTV loans
Compass CEO Robert Reffkin revealed on CNBC how volatile mortgage rates are sidelining homesellers and why a boost in existing-home inventory could happen as early as December.
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Volatile mortgage rate increases have brought the housing market to a creep, as would-be homesellers desperately hold onto the savings they secured during 2020 and 2021’s historic interest rate drop. Since the federal government averted a disastrous June 2 debt default, rates have retreated to the mid-six-percent range — a drop that’s resulted in three consecutive weeks of increasing homebuyer mortgage demand.
So, what will it take to bring homesellers out of hiding and bring the housing market back to life? A five-percent mortgage rate, according to Compass CEO Robert Reffkin.
Robert Reffkin
“Across the board, there are more buyers than sellers,” Reffkin said during a CNBC appearance on Wednesday. “Buyers that have accepted six or seven percentage mortgage rates as a new normal. The issue that we have is there’s just not enough inventory, and that’s because 30 percent of homeowners are locked into mortgage rates at 3 percent or below, and 70 percent of homeowners are locked in a 4 percent or below.”
“We need to have an unlock [of] inventory. It’s probably going to happen when mortgage rates get to 5 to 5.5 percent in a sustainable level,” he added. “At that point, I would expect there to be a flood of inventory in the market. And we’ll feel like the pandemic craze all over again.”
Reffkin said some homebuyers are already bringing their rates down to the five-percent range through buydowns. There are two common ways to complete a buydown: paying a one-time discount point fee at closing to bring the rate down for the lifetime of the loan or using funds escrowed by the seller to temporarily drop the rate for the beginning of the loan.
“There are definitely incentives and buydowns bringing mortgage rates down by two points in a number of our markets,” he said.
While some homebuyers are waiting for the existing-home market to recover, Reffkin said a greater segment of homebuyers are simply turning their attention to the new-home market, which experienced a 20 percent year-over-year increase in May sales.
“[It’s a] great time to be a homebuilder because they’re benefiting from the price increases that are a result of low inventory,” he said. “Homebuilders are meeting [buyer] demand. Last month, we saw the largest amount of housing starts since 2016, and that’s because homebuilders, their sentiment index improved for the first time in over a year.”
Reffkin said it’ll likely be another year before rates drop to the five-percent range; however, the market could still experience a boost in existing-home inventory earlier as homeowners with adjustable-rate mortgages reevaluate the value of their current loans.
“The topic around adjustable rates, which I think people don’t fully appreciate, is that around 30 percent of the people that are locked in at three or four percent mortgage rates had adjustable rate mortgages that are five years, seven years or 10 years,” he said. “So the value of a 5-percent ARM they got in 2022, in six months is not that valuable anymore.”
The lock-in effect is the financial disincentive for existing homeowners to give up the low rate on their existing mortgage.
“You only have another year or year and a half” before ARM borrowers don’t feel locked in by the rate on their existing mortgage, he added. “So I think there’s going to be some new inventory entering the market, even if rates don’t come down because of those ARMs that are getting less value over time.”
Watch the full interview below:
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Editor’s note: This story has been updated to correct that Reffkin said around 30 percent of the people that are “locked in” to mortgages at lower rates have ARM loans, rather than 30 percent were “wanting” mortgages at lower rates.