If residential mortgages go haywire, banks are largely out of the loop this time.
By Wolf Richter for WOLF STREET.
Mortgage balances rose $190 billion, or 1.6% in the first quarter from the fourth quarter, and 3.3% year over year, to a record $12.4 trillion, according to the Fed’s Household Debt and Credit Report of New York. Mortgages make up 80% of total household debt.
But HELOCs (home equity lines of credit) are rising from the ashes. Balances were up 4.4% for the quarter and 10.9% year-over-year at one point.
In terms of mortgage balances, the relatively small increase of 3.3% year-over-year is the result of several factors pulling in different directions: Still high house prices requiring larger mortgages; purchases of existing homes that are foreclosed; the volume of mortgage origination that has fallen; while new home purchases have held up, as prices have fallen by 18%, and buyers are financing less expensive new homes. And a large portion of homeowners with 3% mortgages aren’t selling, and they aren’t buying either, and so they aren’t paying off their 3% mortgages, and they aren’t getting new, bigger mortgages for it. buy more expensive houses:
But HELOC balances are rising from the ashes.
HELOC balances rose $16 billion, or 4.4% in the first quarter from the fourth quarter, and 10.9% year over year, to $376 billion. Despite recent growth, HELOC balances remain historically low after 13 years of steady decline.
HELOCs are a way for homeowners to turn their money buried in their home into usable cash. But to get to their money, they have to pay Wall Street fees and interest on it.
Mortgage rates of 7% have made cash-out refinances, which refinance the mortgage plus cash-out at this high rate, very expensive, and recovery volume has declined. A HELOC may come with interest rates of 9%, or whatever, but it only applies to the amount drawn on the line of credit, not the mortgage that continues at 3%.
Second lien mortgages do the same thing as a HELOC, but have fixed payments for a set term. They’re also an expensive way for homeowners to turn their cash buried in their home into usable cash, as Wall Street will demand pounds of meat.
HELOCs are still a tiny fraction of home debt, accounting for just 3.0% of total mortgage balances in the first quarter, barely up from an all-time low of 2.8% in the third quarter of 2022. Once in 2005 to 2012, HELOCs amounted to 7-8% of the mortgage balance:
Mortgage debt burden.
To measure the burden of mortgage debt on households, we can compare mortgage balances with disposable income, which is what households have left over from their total income, after payroll taxes and social security payments, to dealt with their living costs and to service their debts. .
Disposable income is income from all sources but not capital gains (wages, interest, dividends, rents, farm income, small business income, government transfer payments, etc.), minus taxes and social security payments. And disposable incomes have increased (data from the Bureau of Economic Analysis):
- Quarter over quarter: +1.1%
- Year over year: +4.3%
- Since 2019: +26.7%.
The ratio of mortgage balances to disposable income has been roughly flat for the past four quarters at around 60%. Note how the ratio fell in 2022 and Q1 2023, while wages rose. Recently, wage growth has slowed and the ratio has stabilized near historically low levels:
Delinquencies have not been normalized yet.
Transition to delinquency:Mortgage balances that were 30 days or more delinquent accounted for up to 3.2% of total balances, still lower than at any time before the pandemic (red line in chart below).
HELOC balances that were 30 days or more delinquent were marked up to 2.1% (blue line).
Serious delinquency:Mortgage balances that were 90 days or more delinquent rose to 0.6%, compared to 1.0% and higher before the pandemic (red line in chart below).
HELOC balances that were 90 days or more delinquent decreased to 0.5%, the lowest since 2006 (blue line).
Foreclosures in a post-pandemic pan model.
During the pandemic, with mortgage forbearance and foreclosure bans in effect, the number of consumers with foreclosures plunged to near zero. They have risen since then, but remain well below pre-pandemic Good Times lows.
In the first quarter, there were 44,200 consumers with foreclosures, compared to 65,000 to 90,000 in 2017 to 2019. In other words, they’re not getting back to normal yet. The post-pandemic pan pattern has also appeared in a number of other data:
Foreclosures will not be a problem until
House prices fall and people lose their jobs. This is the short version.
Homeowners who bought their homes more than two years ago and didn’t put money down have a lot of equity in their homes as home prices rise over the years to mid-2022. And that’s the vast majority of homeowners. . But more recent home buyers can get into serious trouble pretty quickly.
If a homeowner with a lot of equity can’t make their mortgage payments because they lost their job or had a medical emergency, they can sell the house, pay off the mortgage with the proceeds, and have some money left over.
If unemployment rises and over the course of a year a million homeowners can no longer make their payments, they can sell their home, pay off their mortgage and move on.
The problem arises when home prices fall to multi-year lows and suddenly a larger share of homeowners are underwater. Being underwater for a homeowner is no big deal as long as they don’t have to sell. They just hang in there, don’t look at Zillow every day, and life goes on.
But if they HAVE to sell, it gets complicated. If a lot of people lose their jobs and can’t make their mortgage payments anymore, and have to sell, then it gets a little messy because it drives prices down even further. The result will be that houses will become more plentiful on the market and more affordable to buy, which will be welcomed by many and solve a crisis.
Banks are largely out of the loop this time.
The mess would hit taxpayers hardest, who are now on the hook for a vast majority of mortgages, not banks. HELOCs are an exception; the government has not yet taken them under its wing. But HELOC balances are still small.
Banks have relatively few mortgages on their books; they sell most of them to government entities who turn them into government-backed MBS and sell them to investors. The lack of banks for most mortgages is one of the key changes since the mortgage crisis. So this time, the Fed can let the housing market do its thing without having to worry about the financial system collapsing under the weight of declining mortgages. The financial system may be hampered by other problems, but not by residential mortgages.
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