US refinancing, delinquencies soar in divided mortgage era

Washington

THE US mortgage market shows a widening gap between winners and losers as affluent borrowers take advantage of record-low rates while protracted unemployment drives serious delinquencies to their highest levels since 2010.

About 2.25 million mortgages were at least 90 days late in July, a 450 per cent increase from pre-pandemic levels and the biggest number since the global financial crisis, according to industry tracker Black Knight.

Meanwhile, new mortgage originations reached a record US$1.1 trillion in the second quarter. Rates on 30-year home loans slipped below 3 per cent for the first time in history in July, enabling more homeowners with the ability to refinance to save hundreds of dollars a month.

There are still nearly 18 million homeowners with good credit and at least 20 per cent equity who stand to cut at least 0.75 per cent off their current rate by refinancing, according to Ben Graboske, president of Black Knight data and analytics.

"We would expect near-record-low interest rates to continue to buoy the market," he said in a statement on Tuesday.

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The diverging trends illustrate how government intervention is aiding many financially secure households while the more vulnerable face mounting threats to their homeownership as the pandemic continues to batter the US economy.

Real estate made up US$30.3 trillion, or 24 per cent of total US household wealth, in the first quarter, according to the Federal Reserve.

"The money is in the homes and people with college education are still working, but the pain is being felt where people are unemployed," Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania, said. "Covid-19 will drive an increase in the already high income-inequality gap, and wealth inequality, actually, which is much more extreme."

While the unemployment rate fell to 8.4 per cent in August, more than 11 million jobs were still lost in the pandemic, the Labor Department reported last week. Supplemental benefits for the unemployed of US$600 a week expired in July and Congress has been at an impasse over a follow-up aid package.

The quarterly jump in new mortgage originations occurred despite public health measures that limited home showings, appraisals and in-person document signings. Refinancing made up about 70 per cent of the new home loans during the period.

Monthly principal and interest payments on a US$400,000 mortgage would be US$1,686 at 3 per cent, compared with US$1,910 at 4 per cent - an annual savings of US$2,688. The average 30-year mortgage rate was 2.93 per cent last week, said Freddie Mac.

More borrowers with ability to refinance are using their equity to get cash. About US$44.5 billion in equity was tapped through cash-out refinancing in the second quarter, the most in more than a decade.

Markets with the biggest delinquency increases in July were Miami, Las Vegas, Orlando, New York and New Orleans.

The number of homeowners in forbearance continued to fall last week and is down by one million from its May peak. But the July 31 expiration of extra unemployment benefits means this month "may provide the true test," Black Knight said in a Sept 4 report. Homeowners with less equity and lower credit quality were more than twice as likely to have entered forbearance plans.

About 11.5 per cent of loans by the Federal Housing Administration and Department of Veterans Affairs were in forbearance last week, compared with 5.1 per cent for Fannie Mae and Freddie Mac borrowers, who have better credit and more equity in their houses. BLOOMBERG