Inflation, home price growth deceleration drive uptick in mortgage default risk

The lifetime default risk of government-backed mortgages increased in the first quarter of 2022 as the housing market continued to face heightened volatility fuelled by rising interest rates.

Results of the Milliman Mortgage Default Index (MMDI) revealed that the default risk for loans acquired by government-sponsored enterprises Freddie Mac and Fannie Mae rose to 2.39% in Q1 2022 from 1.90% in Q4 2021.

According to Milliman, this means that 2.39% of the loans originated in Q1 are expected to become delinquent (180 days or more) over their lifetimes.

Nationwide, mortgage delinquency rates in June inched up by nine basis points to 2.84% and foreclosure starts climbed by 27% to a total of 23,800, Black Knight reported.

“Rising interest rates typically translate to fewer refinance loans or higher-risk refinance loans, leading to increased overall borrower risk for the GSEs,” said Jonathan Glowacki, a principal at Milliman and author of the MMDI. “Combined with inflation, we’re anticipating a slowdown in home price growth, which is what’s driving the uptick in mortgage default risk.”
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Originations of GSE-backed loans continued to drop from the fourth quarter of 2021 to the first quarter of 2022. Of these mortgages, refinance loans made up more than half of originations (roughly 57%), which is generally consistent with the prior quarter.

Those ads aren't going to sell so fast…

Zillow Group Inc. shares plummeted after the company predicted that a significant contraction in home sales would weigh on the amount of advertising it can sell to real estate agents.

The company, which makes most of its money by helping agents connect with homebuyers, has been riding the housing roller coaster for more than two years, shifting from a sharp slowdown in the early days of the pandemic, to the boom that followed, and now a period of higher mortgage rates and cooling sales.

The ongoing downturn led Zillow to project earnings before interest, taxes, depreciation and amortization of $73 million to $88 million in the third quarter, according to a shareholder letter Thursday. That missed the $170 million analysts were expecting, and Zillow shares fell as much as 11% in trading after New York markets closed.

Zillow wasn’t the only real estate technology company to provide discouraging guidance for the third quarter. Brokerage Redfin Corp. also fell in late trading after the company forecast wider losses than analysts estimated. Opendoor Technologies Inc. projected a loss, saying the sharp slowdown in housing demand would push it to cut prices on some of its listings. Its shares rose slightly.

“Agents saw demand go down and longer cycles for their customers to close,” Zillow Chief Financial Officer Allen Parker said on a conference call with investors. “Their natural reaction at a time like this is to reduce their advertising spend somewhat as a protection.”

Zillow, led by chief executive officer Rich Barton, has bounced between business models in a bid to wring greater profits from its massive online audience, which reached 234 million unique visitors per month in the second quarter.

In 2018, the company made an audacious bet on a business called iBuying, predicting that the tech-powered spin on home-flipping would supercharge profits. Zillow’s attempt to rapidly expand the effort faltered, pushing Barton to shutter the business last year in a move he said would protect the company from bigger losses in a future downturn.

Zillow pivoted again, laying plans to build a housing “super app” to integrate tools consumers and agents use to navigate the buying or selling process. The company is adding a new component to that effort, allowing visitors to Zillow’s sites and apps to request a cash offer for their homes from Opendoor.

The arrangement lets Opendoor tap into Zillow’s audience, while helping Barton’s company fulfill consumer demand for a service without putting capital at risk.
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“Despite the challenging housing environment that we cannot control,” Barton said on the call, “we are as confident as ever in what we can control.”

As home values keep rising even those facing foreclosure have positive equity.

Half of all US mortgaged homes are now considered equity-rich, according to a new report by real estate data curator, ATTOM.

According to the US Home Equity and Underwater report for Q2, 48.1% of mortgaged residential properties in the country were considered equity-rich in the second quarter this year, meaning that the combined estimated amount of loan balances secured by those properties was no more than 50% of their estimated market values. Data was collected on more than 155 million properties across the US.

The report provides counts of properties based on several categories of equity — or loan to value (LTV) — at the state, metro, county and zip code level, along with the percentage of total properties with a mortgage that each equity category represents.

‘Equity-rich’ properties are those with a loan to value ratio of 50% or lower, meaning the property owner had at least 50% equity, while ‘seriously underwater’ properties are those with a loan to value ratio of 125% or above, meaning the property owner owed at least 25% more than the estimated market value of the property.

The portion of mortgaged homes that were equity-rich in the second quarter increased from 44.9% in the first quarter and from 34.4% in the second quarter.

The latest increase, covering almost half of all mortgage payers in the US, marked the ninth straight quarterly rise in the portion of homes in the equity-rich territory. The report found that at least half of all mortgage-payers in 18 states were equity-rich in Q2, compared to only three states a year earlier.

Rick Sharga, executive vice president of market intelligence at ATTOM, said he was not surprised by the report’s findings, given how property prices had been rising for so long.

He said: “After 124 consecutive months of home price increases, it’s no surprise that the percentage of equity rich homes is the highest we’ve ever seen, and that the percentage of seriously underwater loans is the lowest.

“While home price appreciation appears to be slowing down due to higher interest rates on mortgage loans, it seems likely that homeowners will continue to build on the record amount of equity they have for the rest of 2022.”

ATTOM’s report also revealed that only 2.9% of mortgaged homes, or one in 34, were considered seriously underwater in Q2, with a combined estimated balance of loans secured by the property of at least 25% more than the property’s estimated market value. That was down from 3.2% of all homes with a mortgage compared to the previous quarter and 4.1%, or one 24 properties, a year earlier.

Across the US, every state except one saw equity-rich levels increase this year due to the fact that home values have kept increasing, while seriously underwater percentages fell in 46 states.

After a flat first quarter, the median single-family home price shot up another 9% quarterly and 15% annually during the Spring of this year to a new high of $346,000.

The report noted that for owners keeping up with mortgage payments – including many that weren’t – that meant a widening gap between what they owed and what their homes were worth, boosting more home values into equity-rich status.

Equity continued “on a relentless upward path” despite home-mortgage rates doubling this year, inflation soaring to a 40-year high and rising fuel costs, among other issues.

Despite the economic uncertainty, the report stressed that there was “little immediate sign that equity gains will flatten out”, mostly because of a “historically tight” supply of properties for sale.

Broken down by region, seven of the 10 states where the equity-rich share of mortgaged homes increased the most between Q1 and Q2 were in the south.

The biggest increases were in Wyoming, where the portion of equity-rich mortgaged homes rose from 26.1% in the first quarter to 33.9% in Q2, Maine, Florida, Mississippi and South Carolina.

By contrast, states where the equity-rich share of mortgaged homes decreased, or went up the least, during the same period were New Jersey (down from 38.6% to 37.9%), Utah, Idaho, North Dakota and West Virginia.

In addition, the largest declines in seriously underwater properties spread across the Northeast, South and Midwest, led by Mississippi (share of mortgaged homes seriously underwater down from 17% to 8.1%), Wyoming, Missouri, Maine and Connecticut.

The only states where the percentage of seriously underwater homes increased from the first quarter to the second quarter were Montana (up from 3% to 3.9%), New Jersey and New York.

Significantly, more than 90% of homeowners facing foreclosure have at least some equity.

Only about 214,800 homeowners were facing possible foreclosure in Q2, the equivalent of just four-tenths of 1% of the 58.2 million outstanding mortgages in the US. Of those facing foreclosure, about 195,400, or 91%, had at least some equity built up in their homes.
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Sharga said: “The fact that over 90% of homeowners in foreclosure have positive equity is good news for borrowers who find themselves in financial distress. These homeowners have the opportunity to leverage this equity to either secure short-term financing to resolve their delinquencies, or to sell their properties at a profit and avoid a foreclosure auction.”

Consumers are the most pessimistic since 2011.

​Consumers have become the most pessimistic about housing since 2011, when home prices bottomed in the wake of the global financial crisis, data from Federal National Mortgage Association shows.

Fannie Mae’s Home Purchase Sentiment Index dropped to the lowest level in over a decade, as consumers expressed pessimism about home buying prospects. The index, which reflects consumers’ views on the housing market, has fallen from roughly 76 to 63 year-over-year, according to a release Monday.

Sentiment hasn’t been as bad since the post-crisis era, when home values plunged as borrowers struggled to make payments, leaving millions facing foreclosure. 

But this time, the concern is different: this is an affordability crisis. As the Federal Reserve raises benchmark borrowing costs, rates on a 30-year fixed-rate mortgages have almost doubled year-over-year, standing at 5.43% in late July compared to 2.97% a year earlier, putting home ownership out of reach for more and more Americans. Sales of new US homes fell to a more than two-year low in June.

“The HPSI has declined steadily for much of the year, as higher mortgage rates continue to take a toll on housing affordability,” Doug Duncan, Fannie Mae senior vice president and chief economist, said in a statement. “Unfavorable mortgage rates have been increasingly cited by consumers as a top reason behind the growing perception that it’s a bad time to buy, as well as sell, a home.”

Four of the index’s six components dropped month-over-month, including views on buying and selling conditions, home-price outlook and job-loss concerns, said Fannie Mae. Consumers were most concerned about buying conditions, as the sentiment changed the most year-over-year with 76% of respondents saying it’s a bad time to buy. 

And although home price appreciation has been the story of the year, consumers are starting to say that the trend is over. Respondents who believe home prices will go up in the next 12 months fell to 39% in July from 44% in June, while the percentage who said home prices will go down increased to 30% from 27%.

With home price growth slowing, and projected to slow further, Duncan expects a mixed reaction from consumers. “Some homeowners may opt to list their homes sooner to take advantage of perceived high prices, while some potential homebuyers may choose to postpone their purchase decision believing that home prices may drop,” he said.
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The index gets the information about consumers’ home purchase sentiment from Fannie Mae’s National Housing Survey.

Those forecasting a shallow downturn are "delusional", according to market observer.

Economist Nouriel Roubini said the US is facing a deep recession as interest rates rise and the economy is burdened by high debt loads, calling those expecting a shallow downturn “delusional.”

“There are many reasons why we are going to have a severe recession and a severe debt and financial crisis,” the chairman and chief executive officer of Roubini Macro Associates said on Bloomberg TV Monday. “The idea that this is going to be short and shallow is totally delusional.”

Among the reasons Roubini cited was historically high debt ratios in the wake of the pandemic. He specifically mentioned the burden for advanced economies, which he said continues to rise, as well as in some sub-sectors. 

That differs from the 1970s, he said, when the debt ratio was low despite the combination of stagnant growth and high inflation known as stagflation. But the nation’s debt has ballooned since the financial crisis of 2008, which was followed by low inflation or deflation due to a credit crunch and demand shock, he added.

“This time, we have stagflationary negative aggregate supply shocks and debt ratios that are historically high,” said Roubini, who is nicknamed Dr. Doom for some of his dire predictions. “In previous recessions, like the last two, we had massive monetary and fiscal easing. This time around we are going into a recession by tightening monetary policy. We have no fiscal space.”

Concern that rising interest rates will drive the economy into a recession has been escalating as the Fed tightens monetary policy aggressively to bring down the steepest inflation in four decades. Fed Chair Jerome Powell has said that failing to restore price stability would be a “bigger mistake” than pushing the US into a recession, which he has continued to maintain the nation can avoid.

Powell and his colleagues are expected to approve another 75-basis-point hike this week after raising rates in June by the most since 1994. Policy makers are also expected to signal their intention to keep moving higher in the months ahead.
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“This time around, we have a confluence of stagflation and of a severe debt crisis,” Roubini said. “So it could be worse than ‘70s and post-GFC.”

Foreclosure starts also up. 

The national mortgage delinquency rate increased by nine basis points in June, data and analytics firm Black Knight has revealed, following consecutive record lows reported in the prior three months.

According to preliminary data from Black Knight’s monthly mortgage performance report, the total delinquency rate reached 2.84% in June. The number of borrowers that were a single payment past due rose by 5%, while 90-day delinquencies saw a slight 1% increase from the previous month.

Additionally, foreclosure starts increased by 27% in June, landing at a total of 23,800. This was still 40% below pre-pandemic levels, even with a significant 441% year-over-year increase from pandemic-driven lows.

These starts made up 4% of serious delinquencies, marking the highest share since March 2020. Despite this jump, the rate of serious delinquencies in June remained less than half of what was seen in before the pandemic.

Active foreclosure inventory also rose by 16,000 from May to June. With a total of 190,000 properties in June, volumes showed signs of slowly budging from record lows due to widespread moratoriums and forbearance protections seen in the years 2020-2021.
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Prepayment activity, meanwhile, was down 7% from the previous month and 64% from the same time last year. This was due to rate hikes putting “downward pressure on both purchase and refinance lending,” said Black Knight.

Previously owned homes have not been faring well either.

Single-family home sales fell to their lowest in over two years last month, the latest sign among many that rising mortgage rates and higher prices have dampened demand for housing.

The Commerce Department announced that home sales dropped 8.1% to a seasonally adjusted annual rate of 590,000 units in June, the lowest recorded since April 2020 and far below economist forecasts of 660,000 units. May sales have since been revised down to 642,000 units from the previously reported 696,000 units.

Sales declined by 17.4% from May last year and peaked at a rate of 993,000 units in January 2021 – the highest level in 15 years, Reuters reported.

Freddie Mac data has revealed that the average contract rate on a 30-year, fixed-period mortgage is 5.54%, increasing by more than 200 basis points since January to match soaring inflation and a tightening monetary policy.

The central bank is expected to raise its policy rate by another 0.75%, bringing the total interest rate hike since March to 2.25%.

Data has also shown a consistent decline in sales of previously owned homes, falling for a fifth straight month in June alongside further decreases in housing starts and building permits. Still, a collapse is unlikely, Reuters reported, as the softening demand could instead meet the housing shortage halfway and slow price growth.
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The median new house price rose by 7.4% in June from a year ago to $402,400, with 457,000 new homes on the market at the end of last month, up 10,000 units from May. Houses under construction made up 67% of the inventory, 24.1% consisting of homes yet to be built. At June’s sales pace, the market would need 9.3 months to clear the supply of houses.

"Mortgage applications declined for the fourth consecutive week"

Mortgage applications dropped once again in the past week, according to the Mortgage Bankers Association (MBA), as refinance and purchase loan activity continued to slow amid growing economic uncertainty.

Sharing the results of its mortgage application survey for the week ending July 22, MBA said loan application volume decreased by 1.8% on a seasonally adjusted basis compared to one week earlier. Refinancing and prepayment activity also dropped 4% from the previous week, while purchase loan applications for single-family homes went down by 1%.
“Mortgage applications declined for the fourth consecutive week to the lowest level of activity since February 2000,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Kan explained that households had been dissuaded from entering the housing market due to affordability challenges posed by mortgage rates “remaining well over 5%.” As a result, purchase applications have fallen “close to lows last seen at the onset of the pandemic,” and refinance applications have gone down 83% below its 2021 level.

“Weakening purchase application trends in recent months have been consistent with data

showing a slowdown in sales for newly constructed homes and existing homes,” added Kan. “A potential silver lining for the housing market is that stabilizing mortgage rates and increases in for-sale inventory may bring some buyers back to the market during the second half of the year.”

The refinance share of mortgage activity decreased to 30.7% of total applications from 31.4% the previous week, while the adjustable-rate mortgage (ARM) share of activity decreased to 9.1% of total applications.

Additionally, the weekly average contract rates for different types of loans saw the following changes:

• 30-year fixed rate mortgages with conforming loan balances fell to 5.74% from 5.82%, with points decreasing 0.61 from 0.65 (including the origination fee) for 80% loan-to-value ratio (LTV) loans.

• 15-year fixed-rate mortgages rose to 4.95% from 4.88%, with points decreasing to 0.67 from 0.76 (including the origination fee) for 80% LTV loans.

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• 5/1 ARMs rose to 4.67% from 4.60%, with points increasing to 0.76 from 0.96 (including the origination fee) for 80% LTV loans.

Some tips to qualifying for a commercial mortgage.

You need to purchase a property for your growing business. But what type of mortgage is going to best suit your needs? What are the costs and fees? And what is the potential for expansion? Here is everything you need to know about a commercial mortgage, from how it works to how it differs from a residential mortgage.

Understanding commercial mortgages 

A commercial mortgage—also known as a business mortgage—is a loan that can help your company’s costs related to the actual building, like building for your business or securing a property. Simply put, a commercial mortgage allows you to buy a commercial property. Common uses for a commercial mortgage include purchasing office space, a factory, a retail space, or a restaurant space. With a commercial mortgage, you could also use your building loan to pay for the costs of construction, if you are unable to find an existing property that is suited to your company’s needs. A commercial mortgage will also cover the cost of expanding the property.

You can use a commercial mortgage to refinance a commercial property. By refinancing with a commercial mortgage, you will be able to extend your payment terms as well as adjust your interest rate. And you have the option to use the commercial mortgage for renovations on your commercial property, if updating your building would help you draw more customers. Retailers and restaurants, for example, have proven that updating the interior of their businesses can encourage a higher volume of business.

How do commercial mortgages work?

As opposed to residential real estate, commercial real estate is defined as property that produces income that is used solely for business purposes. Most common examples of commercial real estate include retail malls, shopping centers, office complexes and buildings, and hotels. Acquiring, developing, and building these properties is financed through commercial real estate mortgages, or loans, i.e., mortgages secured by liens on the commercial property.

Banks and independent lenders are actively involved in making loans on commercial real estate, similar to how home mortgages operate. In addition, pension funds, insurance companies, private investors and other sources—such as the US Small Business Administration’s 504 Loan program—provide funds for commercial real estate.

How do you qualify for a commercial mortgage?

To qualify for a commercial mortgage, lenders will usually need your business to occupy 51% of the property. The loan amount and the rate you will receive depend largely on your credit and the value of the property you are putting up as collateral. The reason for this is that most commercial mortgages are asset-based loans. Here are some different ways you can qualify for a commercial mortgage:

Pick the right location. 

The property’s value impacts the mortgage decision, meaning that securing funding for prime retail space in San Francisco will likely be easier than financing a rural storage unit outside of Keystone, South Dakota. When you are deciding where to buy or build, you will want to take location into consideration.

Communicate renovation plans to lenders. Your lender will always want to know if you plan to make upgrades to a property. Your lender will also need to review the after-repair value, or ARV, for any full-scale property renovations you make. Make sure to have a plan for how you will use the mortgage prior to applying. That way, if the lender has any questions, you’ll have the answers.

Preparing documents. 

Some documents you will need to prepare include the purchase contract, property blueprints, and market analysis of the property. You will also want to include an assessment of the property’s existing conditions and the project budget and scope of work.

Commercial mortgage vs residential mortgage

The key differences between a commercial mortgage and a residential mortgage include the following:

Commercial mortgage: 

This is typically made to business entities such as corporations, developers, limited partnerships, funds and trusts, and usually ranges from five years or less up to 20 years, with the amortization period lasting longer than the loan term. Commercial mortgage loan-to-value (LTV) ratios also usually fall into the 65-80% range.

Residential mortgage. 

A residential mortgage, on the other hand, is usually made to individual borrowers and is an amortized loan in which the debt is paid off in regular installments over a set term. The most popular residential mortgage product is a 30-year fixed-rate mortgage. Additionally, high LTV ratios up to 100% are acceptable for some residential mortgages.

Why are commercial mortgages expensive?

One reason that commercial mortgages are expensive is that their interest rates are usually higher than on residential loans and involve fees that increase the overall cost of the loan. Some of those fees include the appraisal, legal fees, loan application fees, and loan origination or survey fees. Before the loan is approved, or rejected, many of the costs have to be paid up front. Other costs apply annually.