US mortgage rates rose for the second consecutive week, hitting a six-month high, according to Freddie Mac.
Freddie Mac chief economist Sam Khater said that this week’s uptick in mortgage rates is a result of growing optimism about the economy’s recovery from the pandemic. The average rates for a 30-year fixed mortgage climbed 16 basis points to 2.97% this week – the highest since August.
Data from Freddie’s Primary Mortgage Market Survey also showed a week-over-week increase in the 15-year fixed-rate loan and the five-year Treasury-indexed hybrid adjustable-rate mortgage, up to 2.34% and 2.99%, respectively.
Rising mortgage rates are already affecting the demand for home financing across the nation. Mortgage applications fell 11.4% this week, according to the Mortgage Bankers Association.
“Optimism continues as the economy slowly regains its footing, thus affecting mortgage rates,” Khater said. “Though rates continue to rise, they remain near historic lows. However, when combined with demand-fueled rising home prices and low inventory, these rising rates limit how competitive a potential homebuyer can be and how much house they are able to purchase.”
As a result of rising rates, the downturn in mortgage requests continued this week according to the Mortgage Bankers Association.
Data from MBA’s Mortgage Applications Survey showed an 11.4% seasonally adjusted, week-over-week drop in mortgage loan application volume. On an unadjusted basis, applications were down 10% from the week before.
“Mortgage rates have increased in six of the last eight weeks, with the benchmark 30-year fixed rate last week climbing above 3% to its highest level since September 2020,” said Joel Kan, MBA VP of economic and industry forecasting.
Consequently, overall refinance activity fell 11% to its lowest level since December, but remained 50% higher than a year ago. Seasonally adjusted purchase activity also plunged 12% week over week, while the unadjusted purchase index dropped 8%.
The refi share of mortgage activity made up 68.5% of total applications, down from 69.3% the previous week. Meanwhile, the adjustable-rate mortgage (ARM) share of activity rose to 2.7% of total applications.
“Additionally, the severe winter weather in Texas affected many households and lenders, causing more than a 40% drop in both purchase and refinance applications in the state last week,” Kan said. “The housing market in most of the country remains strong, with activity last week 7% higher than a year ago. The average loan size of purchase applications increased to a record $418,000, in line with the accelerating home-price growth caused by very low inventory levels.”
While the Biden administration has pushed the foreclosure and forbearance moratoriums out to June of this year the extension isn’t necessarily a fix to the problem. Sure, given vaccination rates, reopenings, and the expected jobs growth that will come with them, we can probably predict more borrowers in forbearance will be back on their feet come June. But just because they’re earning an income again, that doesn’t mean these borrowers are ready to pay back as much as 15 months’ worth of unpaid mortgage bills. It’s up to governments, servicers, and mortgage professionals to offer solutions that will keep borrowers in forbearance from going into foreclosure and make sure forbearance doesn’t become a chronic problem in the housing market.
To understand what solutions are out there for these borrowers, MPA spoke with Andrew Wang (pictured top) and Woobie Rust (pictured below), CEO and chief compliance officer respectively at Valon, a tech-driven mortgage servicing firm. They explained why extending the moratoriums just ‘kicked the can down the road’ and what solutions are out there for these borrowers.
“Most homeowners, as we can see in general statistics about the US market, are in a position where they don’t have much liquidity,” Wang said. “Even if they get a job that covers monthly payments, it doesn’t really address the fact that they’ve missed 12+ months of monthly payments. The question is, when they’re back working, what are they able to do to compensate for those lost months? There are two answers really: either they win the lottery, or governments and the mortgage industry can come up with a solution.”
Solution #1: The Balloon Payment
The first solution Wang offered would be a government-led initiative that’s already been floated as an option. That option would take a borrower and collect their unpaid mortgage bills into a single balloon payment due after either five years, or when the property is sold. It’s a solution that allows them to stay current on their mortgage payments while giving them much-needed breathing room.
Wang expects this solution is most likely to come through state governments, noting examples in California and Washington DC as signs of some hope for this solution. Wang expects more Democratic-leaning states to deliver this option.
Woobie Rust noted, too, that Fannie and Freddie have already come out with a payment deferral program that will turn these unpaid forbearance months into a balloon payment due down the road.
Solution #2: Refinancing
“The unique difference from the great recession is that homeowners have accrued equity during this crisis,” Rust said. “Now paying the loan off in full is an option for homeowners.”
Wang noted that originators could help these borrowers by refinancing their properties based on accrued home equity. They could get a cash-out refi to pay down the old mortgage debt while creating a new one. However, that solution comes with the key caveat that a borrower just out of forbearance or newly re-employed is not a likely candidate for an agency loan. Securing that refi might mean going the non-QM route, unless the agencies waive some restrictions on refis for these borrowers.
Solution #3: Smarter servicing
While this might not be a silver bullet for borrowers in forbearance, Wang and Rust noted that if servicers are strengthening their data processes and deepening their knowledge of specific state regulations, they can develop more creative solutions for borrowers. It’s important for servicers to know, for example, that borrowers will have 15 months of options and many might have only used a portion of that. Should they need to go back into forbearance, servicers should be able to provide a solution.
Wang and Rust believe services will need creativity and flexibility in order to solve the forbearance issue. It’s their view that a data-oriented, targeted approach by servicers can play a crucial role in setting the groundwork for any meaningful solution. If servicers are to help keep forbearance from becoming a chronic issue, they might have to look to their approaches.
“Forbearance is an interim solution,” Wang said. “But in a more data-oriented industry you should be able to know which borrowers are impacted and selectively target homeowners who are undergoing stress and deploy solutions for them immediately. That’s what we believe the market is heading towards, but it’s not there today.”
An analysis of over three million rental applications by RENTCafé found an interesting trend among Gen Z renters that shows yet another way that this generation is diverging from their millennial predecessors. Where post-college millennials flocked to the nation’s biggest cities in search of jobs, Gen Z renters are increasingly moving to vibrant small towns in states across the American heartland. While residential trends in this generation, born between 1997 and 2012, are still quickly changing, and the chaos of 2020 leaves a number of unanswered questions, the new data presents an interesting insight into where tomorrow’s homeowners are choosing to live now.
The top 20 fastest growing rental markets for Gen Z skewed heavily away from major coastal cities. Most also have fewer than 300,000 residents and generally boast a lower cost of living, with rents below the national average of $1,400. The college town of Greenville, NC topped the list of trending Gen Z cities, with an 84% increase in Gen Z renters since last year. It was followed by Little Rock, AR, North Little Rock AR, and Norfolk VA. Sanziana Bona (pictured), the author of the report, explained just what these trends could mean for the housing market.
“The high cost of renting in big cities, combined with college debt, make it harder for Gen Zs to afford to live in bigger cities,” Bona said. “With these economic factors in mind, more people are looking towards smaller, more affordable markets with a vibrant local scene, where they can not only afford rent, but get a larger space than they would in a big city.”
Bona explained that much of this trend is being driven by a longer-term shift among businesses to smaller, more affordable markets and the accelerated rise of remote work, enabling companies based in major metros to hire with less regard for geography. Those recent graduates lucky enough to find work now will most likely be working from home, Bona explained, offering them much more freedom when it comes to choosing where to live.
The key determinants in this picture, Bona said, are the long-term impacts of the COVID-19 pandemic. If working from home remains close to as widespread as it is now, Bona believes we may see this trend of Gen Z living in smaller towns hold true for longer. If that happens, we should expect these small town rentals to turn into small town purchases down the road.
“If the current trend is to continue and Gen Zs are going to remain in small and mid-sized cities, they can and will contribute to the local economy, which in turn will lead to the revival of such areas,” Bona said. “It’s safe to say that Generation Z is very financially conscious, and they don’t engage in investments they can’t afford. If this trend continues, developers and commercial mortgage professionals from superstar cities will have to shift their attention towards small and mid-sized markets in the heartland to accommodate the demand. But how the ongoing pandemic will affect all this remains to be seen.”
US mortgage rates have reached their highest point since mid-November, according to Freddie Mac’s Primary Mortgage Market Survey.
The average 30-year fixed-rate mortgage jumped from 2.73% to 2.82% week over week. Freddie Mac chief economist Sam Khater said that the rise was mainly driven by supply issues.
“Economic spending has improved due to the most recent stimulus, but supply chain shortages are causing downstream inflation, leading to higher mortgage rates,” he said. “While there are multiple temporary factors driving up rates, the underlying economic fundamentals point to rates remaining in the low 3% range for the year.”
The 15-year fixed-rate mortgage also saw an increase this week, up from 2.19% to 2.21%. Meanwhile, the 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) dipped two basis points to 2.77% week over week.
Many prospective home buyers have pulled back from the mortgage market due to the increase in mortgage rates. The Mortgage Bankers Association reported that total mortgage applications fell 5.1% from the previous week.
Mortgage loan application volume fell 5.1% week over week, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey.
The MBA’s composite index posted a 5.1% seasonally adjusted decline. On an unadjusted basis, it was down 4% week over week.
“Expectations of faster economic growth and inflation continue to push Treasury yields and mortgage rates higher. Since hitting a survey low in December, the 30-year fixed rate has slowly risen, and last week climbed to its highest level since November 2020,” said Joel Kan, MBA’s AVP of economic and industry forecasting. “The uptick in rates has slightly dampened refinance activity, with MBA’s index falling for the second week in a row, and the overall share dipping below 70% for the first time since last October.”
The average contract interest rate for 30-year fixed mortgages with conforming loan balances ($548,250 or less) jumped to 2.99% from 2.96%. Thirty-year fixed mortgages with jumbo loan balances hovered at 3.11%.
The refinance share of mortgage activity decreased to 69.3% of total applications, while adjustable-rate mortgage applications increased to 2.4% of totals.
“The housing market in early 2021 continues to be constrained by low inventory and higher prices,” Kan said. “Conventional and government applications to buy a home declined last week, but purchase activity overall is still strong, up 15% from last year. The average purchase loan size hit another survey high at $412,200, partly due to a larger drop in FHA applications, which tend to have smaller-than-average loan sizes.”
US credit-card balances fell by the most on record last year even as households increased their total debt by taking on new mortgages, the Federal Reserve Bank of New York said.
Total debt rose by $206 billion in the fourth quarter, bringing the annual increase to 3% to set a record of $14.56 trillion, the data show. Home loans, which increased 5% last year, crossed the $10 trillion threshold for the first time. Credit-card debt rose slightly in the fourth quarter, but ended the year down 12% from 2019, the largest annual decline ever in data analyzed by the New York Fed. Late payments also fell.
The changes in household debt reflect the topsy-turvy nature of 2020, when record-low interest rates fueled a surge in mortgage refinancings by well-heeled homeowners that at times overwhelmed lenders and investors. At the same time, millions of households were set back by mounting joblessness and an increase in hunger. Credit-card balances fell because households reached for their debit cards first and spent much of the year paying down unsecured debt.
Delinquency rates dropped to 3.17% -- the lowest figure ever in New York Fed data -- in large part because Congress and lenders allowed borrowers to postpone required monthly payments.
Households with the highest credit scores were among the biggest beneficiaries. The typical mortgage during the latter half of 2020 went to borrowers with a credit score of 786, the highest level ever in New York Fed data.
Most new mortgages last year refinanced old ones, and homeowners withdrew $182 billion in home equity throughout the year. But at least half of those cash-out refinancings involved amounts just enough to cover typical closing costs, suggesting widespread caution among homeowners. Borrowers who didn’t withdraw equity from their homes while refinancing reduced their monthly mortgage payment by about $200 on average.
Apartment List’s 2021 Millennial Homeownership Report has some shocking findings. While the belated entry of millennials into the housing market was one of the stories of 2020, and one of the tailwinds mortgage pros are counting on for 2021, 18% of millennial renters surveyed said they never expect to own a home, up from 12% the year before. Clearly, while many millennials are entering the housing market, many others are coming to believe it’s out of their reach.
Rob Warnock, a research associate at Apartment List, explained why so many of these millennials feel like they’ll never achieve homeownership. Their pessimism, he explained, is due in large part to skyrocketing housing prices and a sense that a 20% down payment is something they could never afford. He noted, as well, that coming of age during the Great Financial Crisis created a combination of anxiety and pessimism when it comes to the housing market. The COVID-19 pandemic hasn’t helped to alleviate that.
“At least in 2008 home prices didn’t skyrocket,” Warnock said. “We had a global recession, unemployment went up and people struggled to find an income, but housing prices responded to that…Now the economy is doing very poorly, unemployment is high, while the housing market is moving along as if this isn’t an issue.”
He attributes some of this millennial pessimism to a sense of “unfairness” in the housing market, a belief that they’re locked out. Survey data backs that up, with 74% of the respondents who don’t expect to ever own a home claiming they can’t afford one. In addition, 63% of all the millennial renters surveyed had $0 saved for a down payment, and only 15% had more than $10,000 saved.
To Warnock, that sense of unfairness isn’t unfounded. In our current recession, many more people are being left behind while whole swathes of society have seen their financial situations actually improve. Those who have been left behind are disproportionately younger. While many millennials entered the housing market in the past year, many others are being left behind.
The survey also shows that Black millennials see themselves as even further away from homeownership than their white neighbours. By age 30, only 20% of Black millennials own homes, as opposed to 51% of whites. Even compared to Black gen-xers and baby boomers, Black millennials are further behind in homeownership.
Interestingly, 21% of those respondents who expect to never own a home claimed buying a home is “financially risky.” Warnock said this might be a holdover from the millennial experience of 2008, considering that at almost any other point in modern American history, the housing market has been a solid investment.
While these numbers point to a gloomy outlook for millennials, they also show some signs of opportunity for mortgage professionals. Through education and outreach, mortgage pros can show these disaffected renters how they can surmount the challenge of a down payment. They can explain how today’s low-rate environment can offer a chance for affordable homeownership that huge listing prices on properties might not display. It’s easy for a younger person who’s never owned property to look at a $500,000 home and think they’ll never achieve homeownership. It takes education and creativity to capture that market and show them that it’s easier than they might think.
“The signals that we get from our survey are that affordability, and in particular the down payment, is the biggest financial hurdle that causes a lot of millennials to feel locked out of the housing market,” Warnock said. “Getting the word out on new, more innovative forms of financing that address those upfront costs of ownership would be extremely valuable for millennials.”
The National Multifamily Housing Council (NMHC) reported that 79.2% of apartment households made a full or partial rent payment by February 06 in its survey of 11.6 million units of professionally managed apartment units across the country.
The share of those who paid rent was down 1.9% (216,479 households), according to NMHC’s Rent Payment Tracker. This is compared to 76.6% that had paid by January 06.
“As we approach almost a full year of navigating the pandemic and the resulting financial distress, we remain encouraged by the COVID relief package passed at the end of 2020 that included critical support for apartment residents and the nation’s rental housing industry such as $25 billion in rental assistance, extended unemployment benefits and direct payments,” said NMHC president Doug Bibby. “However, as lawmakers consider further relief legislation, additional support for renters is clearly needed.”
NMHC estimates that landlords lost around $27 billion to nearly $60 billion of rent in 2020 due to the pandemic.
“In the coming days and weeks, we urge members of Congress to pass legislation that directly meets renters’ basic financial hardships, protects the nation’s rental housing industry and efficiently provides funds to those who need it most,” Bibby said.
Despite five million renters and homeowners missing their December payments, fewer believed they are at risk of eviction or foreclosure, according to research released by the Mortgage Bankers Association’s (MBA) Research Institute for Housing America (RIHA).
The study revealed that 2.62 million renters (7.9%) and 2.38 million homeowners (5.0%) missed payments. The number of households who felt at risk of losing their homes due to unpaid rent and mortgages, however, declined in December - approximately 2.3 million renters feared that they would be forced to move in the next 30 days, while 1.2 million homeowners with mortgages felt vulnerable to foreclosure.
“This confidence is perhaps an indication that direct checks and enhanced unemployment benefits, rental assistance, mortgage forbearance programs, and a federal eviction moratorium have so far been effective in keeping people in their homes,” said Gary Engelhardt, professor of economics in the Maxwell School of Citizenship and Public Affairs at Syracuse University.
However, many housing advocates have warned that the eviction and forbearance moratoriums have only put off the problem. Once they expire, they predict a flood of foreclosures threatens to add to the impending renter-eviction crisis.
In aggregate, rental property owners posted a $7.2 billion revenue loss from missed rent payments in the fourth quarter. This was down from over $9.1 billion in the third quarter. Meanwhile, total missed mortgage payments were estimated to be approximately $14.2 billion for Q4, down from Q3’s $19.4 billion.
"Gradual improvements in the labor market and economy helped more rented and homeowners make their housing payments at the end of 2020. However, the COVID-19 pandemic continues to cause financial stress for millions of Americans, and particularly for those who rent and have student loan debt," Engelhardt said.
“The distribution of several effective vaccines will hopefully slow the pandemic. In the meantime, providing targeted relief for those facing hardships until the ‘new normal’ will be key to preventing wider disruption to the housing market and overall economic recovery,” said Edward Seiler, executive director of Research Institute for Housing America.