Last autumn we wrote that the increase in interest rates was unlikely to cause a major disruption in the housing market and that the greatest risk facing the housing finance system resides in the ability of GNMA seller/servicers to satisfy demands on their cash to fund new loans and address delinquencies and repurchase requirements.
Now, with a little hindsight, we can observe that as predicted, we do not anticipate a generalized housing market collapse. While the underpinnings of the housing market remain stable (as shown below) we continue to believe that there is heightened liquidity risk especially concentrated among the non-bank financial sector for accommodating any sudden increases in mortgage defaults.
1) Consumers continue to be in a stable position. Unlike the mortgage crisis of 2008-2009, homeowners have substantial equity in their real estate holdings. As shown in Figure 1, homeowner equity levels today are more than double the level it was at the time of the mortgage crisis.[1] Figure 2 shows household debt service as a percent of disposable income continues to show markedly downward trend and remains stable at the pre-COVID levels representing a general deleveraging by households.[2] Finally, Figure 3 supports stable employment environment with the unemployment rate returning to the pre-COVID level.[3]
2) Mortgage market performance remains healthy. The primary and secondary mortgage market continues to be stable. Delinquencies continued a downward trend with 90+ day rate dropping from 0.9% in Feb. 2020 and stabilizing at 0.6 – 0.5% mark since July 2020. The 30–89-day delinquency rate has dropped sharply from pre-COVID levels and is now hovering the 1% mark, as shown in Figure 4. While foreclosure starts have increased year over year as illustrated in Figure 5, the foreclosure rate during the most recent three years has been distorted by the nationwide forbearance programs implemented as a result of the COVID pandemic.[4] Long-term home mortgage rates increased in 2022 when Fed took aggressive action to slow inflation but both, the interest rates and inflation may have already peaked as shown in Figures 6 [5] and 7 [6].
The bottom line is that the sky isn’t falling as the financial sector continues to perform despite troubling developments. We continue to believe that the underpinnings for the housing market remain solid as long as the financial sector can accommodate short-term unexpected downturns.
Regarding softening of home prices and price declines in specific overheated markets, Daren Bloomquist, VP of Auction.com opined that “I would expect home price declines to stay in the single digits in most local markets, absent any additional shocks or surprises.”[7]
The recent decline in loan origination volume had an impact on Reverse Mortgage Funding’s (RMF’s) HECM servicing business, which caused its loan-securitization outlets to freeze both private-label bonds and Ginnie Mae-guaranteed HECM-backed securities. These events triggered a cascade of defaults on RMF’s warehouse-lending lines, which provided the lifeblood cash flow for the lender resulting in their bankruptcy at the end of 2022.
Danielle Hale of Realtor.com observed the silver lining to downward pressure on housing prices:
… lower buyer competition means they can expect selling to take longer than it has in the recent past. While home prices are expected to remain high, even increasing on a year-over-year basis, buyers will have more negotiating power, so sellers will have to make more concessions than they have over the last two years.[8]
Recent news of Wells Fargo exiting the correspondent production channel may affect the non-bank originators who now need to identify other options for offloading their mortgage portfolio. According to Keefe, Bruyette & Woods (KBW), Ginnie Mae servicing is believed to make up 10 percent of Wells Fargo portfolio. KBW states that, “…if Wells Fargo meaningfully reduces its role in the FHA market, this could lead to less availability and somewhat higher rates in that channel.” This could also amplify the liquidity needs for the non-bank originators who largely rely on third party correspondent lenders such as Wells Fargo. We will continue to monitor the non-bank risk as it pertains to the housing market.
Footnotes
[1] https://www.attomdata.com/news/market-trends/foreclosures/attom-september-and-q3-2022-u-s-foreclosure-market-report/
[2] https://fred.stlouisfed.org/series/MORTGAGE30US
[3] https://www.bls.gov/news.release/pdf/cpi.pdf
[4] Board of Governors of the Federal Reserve System (US), Households; Owners’ Equity in Real Estate, Level [OEHRENWBSHNO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/OEHRENWBSHNO, January 11, 2023.
[5] Board of Governors of the Federal Reserve System (US), Household Debt Service Payments as a Percent of Disposable Personal Income [TDSP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TDSP, January 10, 2023.
[6] https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
[7] https://themreport.com/featured/12-16-2022/navigating-stormy-seas
[8] Ibid.