Loan sizes also suffered a year-on-year 'moderation'.
October mortgage applications for new home purchases have slowed down on both a monthly and yearly basis, data from the Mortgage Bankers Association (MBA) has revealed. The latest numbers from MBA’s builder application survey are in, showing even less (-13%) new home purchase activity in October than there was in September, and a 28.6% drop compared to October last year. The data does not reflect adjustments typically made for seasonal patterns. MBA vice president and deputy chief economist Joel Kan said the sharp rise in mortgage rates to 7% drove down overall demand for new homes as well as the purchasing power of many prospective buyers, resulting in weaker new home purchase results. The average loan size also decreased to $400,616 – an 8% decrease from its peak in April this year, Kan observed, and a 1.51% dip from $406,767 the previous month. The MBA attributed the latest ‘moderation’ in loan sizes to slower home-price growth and less demand for higher-priced homes. MBA’s measure of new single-family home sales shrank to a seasonally adjusted annual rate of just 598,000 units in October, the slowest annualized pace registered since July 2022 and a 6.1% decrease from September’s rate of 637,000 units. By product type, conventional loans made up 68.6% of October loan applications, FHA loans made up 20%, Veterans Affairs loans made up 11%, and USDA rural housing service loans made up 0.3%. MBA’s builder application survey tracks application volume from mortgage subsidiaries of home builders across the country to provide an early estimate of new home sales volumes at the national, state, and metro level. Official new home sales estimates are conducted monthly by the Census Bureau by recording sales upon contract-signing, which generally coincides with mortgage applications.
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Old mortgages are having a big impact.
Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago - until she received paperwork claiming she owed more than $130,000. “I was shocked,” said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. “I don't even know these people because they never contacted me. They never called me.” Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago. Some of these homeowners say they weren't even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages. Now they're being told the loans weren't dead after all. Instead, they're what critics call “zombie debt” - old loans with new collection actions. While no federal government agency tracks the number of foreclosure actions on second mortgages, attorneys aiding homeowners say they have surged in recent years. The attorneys say many of the loans are owned by purchasers of troubled mortgages and are being pursued now because home values have increased and there's more equity in them. “They've been holding them, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney with the Boston-based National Consumer Law Center. “And then all of a sudden they're coming out of the woodwork and are threatening to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.” Attorneys for owners of the loans and the companies that service them argue that they are pursuing legitimately owed debt, no matter what the borrower believed. And they say they are acting legally to claim it. How did this happen? Court actions now can be traced to the tail end of the housing boom earlier this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which homebuyers could take out a first loan covering about 80% of the purchase price, and a second loan covering the remaining 20%. Splitting loans allowed borrowers to avoid large down payments. But the second loans could carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans - many originating with since-discredited lenders - included predatory terms and were marketed in communities of color and lower-income neighborhoods. The surge in people falling behind on mortgage payments after the Great Recession began included homeowners with second loans. They were among the people who took advantage of federal loan modification programs, refinanced or declared bankruptcy to help keep their homes. In some cases, the first loans were modified but the second ones weren't. Some second mortgages at that time were “charged off,” meaning the creditor had stopped seeking payment. That doesn't mean the loan was forgiven. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure. Other borrowers say they had difficulty getting answers about their second loans. In the Miami area, Pastor Carlos Mendez and his wife, Lisset Garcia, signed a modification on their first mortgage in 2012, after financial hardships resulted in missed payments and a bankruptcy filing. The couple had bought the home in Hialeah in 2006, two years after arriving from Cuba, and raised their two daughters there. Mendez said they were unable to get answers about the status of their second mortgage from the bank and were eventually told that the debt was canceled, or would be canceled. Then in 2020, they received foreclosure paperwork from a different debt owner. Their attorney, Ricardo M. Corona, said they are being told they owe $70,000 in past due payments plus $47,000 in principal. But he said records show the loan was charged off in 2013 and that the loan holders are not entitled to interest payments stemming from the years when the couple did not receive periodic statements. The case is pending. “Despite everything, we are fighting and trusting justice, keeping our faith in God, so we can solve this and keep the house,” Mendez said in Spanish. Second loans were packaged and sold, some multiple times. The parties behind the court actions that have been launched to collect the money now are often investors who buy so-called distressed mortgage loans at deep discounts, advocates say. Many of the debt buyers are limited liability companies that are not regulated in the way that big banks are. The plaintiff in the action on the Mendez and Garcia home is listed as Wilmington Savings Fund Society, FSB, “not in its individual capacity but solely as a Trustee for BCMB1 Trust.” A spokeswoman for Wilmington said it acts as a trustee on behalf of many trusts and has “no authority with respect to the management of the real estate in the portfolio.” Efforts to find someone associated with BCMB1 Trust to respond to questions were not successful. Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic statements or other consumer protection laws. In Georgia, a woman facing foreclosure claimed in federal court that she never received periodic notices about her second mortgage or notices when it was transferred to new owners, as required by federal law. The case was settled in June under confidential terms, according to court filings. In New York, Prophete is one of 13 plaintiffs in a federal lawsuit claiming that mortgage debt is being sought beyond New York's six-year statute of limitations, resulting in violations of federal and state law. “I think what makes it so pernicious is these are homeowners who worked very hard to become current on their loans,” said Rachel Geballe, a deputy director at Brooklyn Legal Services, which is litigating the case with The Legal Aid Society. “They thought they were taking care of their debt.” The defendants in that case are the loan servicer SN Servicing and the law firm Richland and Falkowski, which represented mortgage trusts involved in the court actions, including BCMB1 Trust, according to the complaint. In court filings, the defendants dispute the plaintiff's interpretation of the statute of limitations, say they acted properly and are seeking to dismiss the lawsuit. “The allegations in the various mortgage foreclosure actions are truthful and not misleading or deceptive,” Attorney Daniel Richland wrote in a letter to the judge. “Plaintiff's allegations, by contrast, are implausible and thus warrant dismissal.” Rates rise back up as housing market adjusts to tightening monetary policy
After a brief pause last week, mortgage rates increased once again in line with the Federal Reserve’s recent rate hike. Freddie Mac’s Primary Mortgage Market Survey showed that the 30-year fixed-rate mortgage returned to its record-high of 7.08% - up from 6.95% last week. Compared to a year ago, the average 30-year fixed mortgage rate was 2.98%. The average 15-year fixed-rate mortgage jumped to 6.38%, up nine basis points from the previous week and a huge bump from last year’s 2.27%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 6.06%, up from 5.95% last week and from 2.53% this time a year ago. “As the housing market adjusts to rapidly tightening monetary policy, mortgage rates again surpassed seven percent,” said Freddie Mac chief economist Sam Khater. “The housing market is the most interest-rate sensitive segment of the economy, and the impact rates have on homebuyers continues to evolve. Home sales have declined significantly and, as we approach year-end, they are not expected to improve.” Consumer expectations on mortgage rates also continued to degrade. According to Fannie Mae, the net share of those who think mortgage rates will go down over the next 12 months decreased to just 6%. Borrowers stay on the sideline as housing gets less affordable.
Mortgage applications remained virtually unchanged for the week ending November 4, with both refinance and purchase applications hovering at record lows. Home loan application volume edged down 0.1% on a seasonally adjusted basis from the prior week, according to the Mortgage Bankers Association (MBA). On an unadjusted basis, total applications dropped 2% week over week. MBA’s seasonally adjusted purchase index increased by 1%, while the refinance index fell 4% from the previous week. Compared to the same period a year ago, purchase applications were down by 41%, and refi applications were 87% lower than last year’s levels. “Purchase applications increased for the first time after six weeks of declines but remained close to 2015 lows, as homebuyers remained sidelined by higher rates and ongoing economic uncertainty,” said Joel Kan, MBA’s deputy chief economist. “Refinances continued to fall, with the index hitting its lowest level since August 2000.” The refinance share of mortgage activity decreased five basis points to 28.1% of total applications, while the adjustable-rate mortgage share of activity increased to 12%. Demand for mortgage loans continued to wane as mortgage rates climbed higher. MBA reported Wednesday that the contract rate on a 30-year fixed-rate mortgage spiked to 7.14%. “Mortgage rates edged higher last week following news that the Federal Reserve will continue raising short-term rates to combat high inflation,” Kan said. “The 30-year fixed rate remained above 7% for the third consecutive week, and there were increases for most other loan types.” Projection would put further pressure on Fed if correct.
US inflation probably moderated just slightly in October data due Thursday, and yet another above-forecast reading may dash expectations for the Federal Reserve to downshift from steep interest-rate hikes. Economists project the consumer price index and the core measure that excludes food and energy both cooled on an annual basis, but to rates still consistent with persistent and elevated inflation. The overall CPI is seen rising from a month earlier by the most since June. Inflation gauge Median estimate CPI MoM +0.6% CPI YoY +7.9% Core CPI MoM +0.5% Core CPI YoY +6.5% That’s keeping a fifth-straight 75 basis-point increase in interest rates on the table for the Fed’s meeting next month, though traders are leaning more toward a half point. Also, rising prices have pushed the Fed to eye a higher peak rate next year than officials were projecting a couple months ago. Either way, a still-tight labor market underscores what’s likely to be a relatively slow decline in the coming months for inflation, which has been a major factor in this week’s midterm elections. The overall annual inflation rate exceeded forecasts in six of the prior seven months. “An upside surprise would be more likely to be driven by underlying strength and together with the resilient jobs report would further raise the risk that policy rates will need to rise higher to quell inflation,” Citigroup Inc. economists Veronica Clark and Andrew Hollenhorst said in a note. Predictions from major banks: Firm CPI (MoM) Core CPI (MoM) Bank of America 0.5% 0.4% Citigroup 0.6% 0.4% Deutsche Bank 0.6% 0.5% Goldman Sachs 0.5% 0.4% JPMorgan Chase Securities 0.6% 0.4% Morgan Stanley 0.7% 0.5% Wells Fargo 0.6% 0.5% The Fed is on its most aggressive interest-rate hike campaign since the 1980s to rein in demand across the economy, including for labor. Chair Jerome Powell said last week that in order to stomp out inflation, the central bank wants to see softer job-market conditions, but so far that hasn’t happened yet in an “obvious” way. A report Friday showed that the US added more jobs than expected in October, and average hourly earnings accelerated from September. Even though pay gains aren’t keeping pace with inflation, they’re still helping give Americans the wherewithal to keep spending and boosting labor costs for businesses, which in turn is maintaining upward pressure on prices. “If the labor market is surprising us with strength and resilience, then we shouldn’t anticipate a different outcome with consumer prices,” said Carl Riccadonna, chief US economist at BNP Paribas. “One is going to follow the other. Labor is slow to turn, and the same goes for inflation.” While watching the subtleties of inflation reports, Fed officials are also worried about the impact big headline numbers are having on consumers’ wage and price expectations. “They let the headline get away from them and they want to get the headline down to 2%,” said Lara Rhame, chief economist at FS Investments. “They are focusing on the top-line year-over-year calculation.” Other Components The headline figure, which was up 8.2% in September from a year ago, reflects broad price pressures across the economy. In recent months, some of the biggest contributors have been food, medical care and shelter. While some measures of home prices and rents have slowed or even declined in recent months, it takes awhile to be reflected in the CPI. Fed Governor Christopher Waller said last month that if housing prices continue to increase rapidly, other components in the core inflation basket “would need to moderate considerably” to provide the lower overall inflation readings Fed officials are seeking. One area where inflation is cooling is goods -- such as cars and apparel -- reflecting improved supply chains and shifting spending patterns toward services. But that moderation hasn’t nearly offset the price pressures emanating from services. In the September CPI, core services that exclude energy climbed 6.7% from a year earlier in the biggest annual advance since 1982. The Institute for Supply Management’s October survey of manufacturers showed prices paid for materials contracted for the first time since 2020, while the group’s services report indicated costs accelerated. Thursday’s report may also show a reversal in the costs of health insurance, which has increased more than 2% on average this year, and the broader medical care services category, according to Omair Sharif, founder of Inflation Insights LLC. The pandemic and subsequent recovery in the economy caused big swings in medical care services costs and are set to weigh on the CPI, according to Bloomberg economists. A further wrinkle is that the government will now include Medicare Part D premium and benefit expenditures in its retained earnings calculation. They're now near their highest level since 2001.
US mortgage rates resumed an upward trend last week toward a two-decade high, pointing to further weakness in housing demand. The contract rate on a 30-year fixed mortgage increased to 7.14% in the week ended Nov. 4, near the highest since 2001, according to Mortgage Bankers Association data released Wednesday. The group’s index of applications to buy a home edged up 1.3%. The overall measure of applications, which includes refinancing, slipped and is the weakest since 1997. An index of refinancing activity fell to a 22-year low. The housing market -- one of the most sensitive areas of the economy to changes in interest rates -- has deteriorated rapidly this year as the Federal Reserve tightens monetary policy to help reduce inflation. The steady climb in fixed mortgage rates is encouraging more homebuyers to seek out cheaper financing options such as adjustable-rate loans. The five-year adjustable mortgage rate rose to 5.87%, the highest in data back to 2011. The MBA survey, which has been conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and thrifts. The data cover more than 75% of all retail residential mortgage applications in the US. Homebuyers pull back as the housing market enters sharp correction.
US consumer confidence in the housing market hit an all-time survey low in October, in line with the cooldown projected to continue in the coming months. Fannie Mae's Home Purchase Sentiment Index (HPSI) fell for the eighth consecutive month to its lowest reading since 2011, down 4.1 points to 56.7 in October. Compared to a year ago, the index was down 18.8 points. The HPSI components associated with home buying and selling conditions posted significant declines, as persistently high home prices and unfavorable mortgage rates continue to fuel consumers' housing affordability concerns. The percentage of respondents who said it is a good time to buy a home decreased eight points to 16%, a new record low. The share of consumers who believe now is a good time to sell a home plunged 17 percentage points to 51% in October. "Consumers are increasingly pessimistic about both homebuying and home-selling conditions," said Fannie Mae chief economist Doug Duncan. "Amid persistently high home prices and unfavorable mortgage rates, the 'bad time to buy' component increased to a new survey high this month, while the 'good time to sell' component continued its downward trend." Home prices also remained a top concern for consumers. However, more homeowners expect prices to go down in line with forecasts of home price declines in 2023. Only 30% of respondents said they anticipate prices to go up, while the share of those who expect prices to drop increased to a new survey high of 37%. "As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months, consistent with our forecast," Duncan said. Other key findings of the October HPSI include:
A resilient jobs market is spurring further action by the Fed.
The odds of a US recession are rising. And the chances it will be mild are falling. The seeds of an eventual downturn are being sown by a taut jobs market that is pushing up wages and inflation, prompting the Federal Reserve to raise interest rates further into restrictive territory to get price pressures under control. “The higher the Fed needs to go on the terminal rate, it raises our conviction that a recession will happen next year,” said Deutsche Bank AG chief US economist Matthew Luzzetti. “But it also raises the risk it will be a deeper one.” Data out on Friday are expected to show that the labor market remains too tight for the Fed’s liking. While projections show October payroll growth moderated to 200,000, such an increase would still be higher than a monthly pace shy of 100,000 that economists reckon is neither too strong nor too weak for the economy over the longer term. Fed Chair Jerome Powell again made clear on Wednesday that the central bank needs to bring labor supply and demand back into better balance if it’s to succeed in reducing inflation to its 2% goal from 6.2% in September. Wages are rising at about a 5% annual clip, above the 3%-3.5% rate thought to be consistent with the Fed’s inflation objective. Speaking to reporters after the Fed raised interest rates by another 75 basis points, Powell voiced hope that a softening of the labor market could come about mainly through a drop in highly elevated job vacancies rather than via outright job losses. He said it was still possible the US could avoid a recession though he acknowledged that the window for doing so has narrowed give how persistent inflation has proven to be. Midterms Looming Ahead of the midterm elections next week, some Democrat lawmakers have stepped up their warnings to the Fed against continuing to raise interest rates at an “alarming pace” and risking jettisoning millions of Americans out of work. However, an increasing number of economists think it will take a recession for the Fed to achieve its aim of cooling price pressures. The probability of a downturn over the next 12 months stands at 60%, up from 50% odds in September and double what it was six months ago, according to a Bloomberg survey of economists last month. On the whole, they expect the recession to be mild. Economists who saw a greater than 50% chance of a downturn over the next 12 months in the survey forecast a rise in unemployment to about 5% on average. (Bloomberg Economics is forecasting an increase to 4.9%). While that would likely mean the loss of more than two million jobs, the 1.5 percentage points rise in joblessness would be significantly below the 3.8-points average increase in the 12 downturns since World War II. And it would represent a much better outcome than the last two contractions, which saw unemployment rise to double-digit levels as a result of the pandemic and the global financial crisis. But some economists think that’s too sanguine. They argue that it will take a deeper contraction in the labor market for increasingly entrenched inflation to retreat. “It could start out feeling like a mild recession but then intensify as we move through time,” said Aneta Markowska, chief financial economist at Jefferies in New York. She sees a downturn beginning in the third quarter of 2023 that eventually pushes unemployment to about 7%. Markowska said the Fed will be hesitant to cut interest rates, which in turn will lead to a deeper downturn. Fiscal policy could also end up as drag on the economy if Republicans gain control of Congress in the midterms and push for cuts in government spending, Luzzetti said. Northwestern University professor Robert Gordon reckons that unemployment would have to rise to at least 6% for the Fed to lower inflation back to target over the next few years. Inflation is being boosted not only rising wages but also by slumping productivity, which is putting further upward pressure on companies’ unit labor costs, he said. “The Fed is not going to be successful in bringing down inflation as much as it wants over the next two years and it will have to face a choice of temporarily giving up on its objective on inflation or raising rates a lot higher than the market thinks it will,” Gordon said. Costly Drop Getting inflation down from an eventual 3% to 2% will be particularly costly, said Johns Hopkins University professor Laurence Ball. While the Fed should continue to talk tough now to contain inflation expectations, Ball said it might ultimately be better off not trying to push price gains all the way back down to its target. Nomura Securities senior US economist Robert Dent, who was among the first on Wall Street to forecast a recession, now thinks it will be deeper than he first thought. He sees the unemployment rate rising to 6.4% in 2024, instead of 5.9%, with a payrolls loss of about three million. The reason for the more pessimistic take: Inflation appears increasingly entrenched and labor shortages are proving to be more long-lasting. “It feels like a mild recession may be out the door,” he said. “It’s more of a moderate one in the base case with the risk of something more severe.” Mortgage applications dwindle for the sixth straight week.
The Mortgage Bankers Association (MBA) reported another dip in home loan applications as interest rates continue to rise. During the week ending October 28, MBA saw a 0.5% drop in its market composite index, a measure of mortgage application volume. The refinance index increased by 0.2%, and the purchase index decreased by 1% from the previous week. "Mortgage applications declined for the sixth consecutive week despite a slight drop in rates. The 30-year fixed rate decreased for the first time in over two months to 7.06% but remained close to its highest since 2002," said MBA deputy chief economist Joel Kan. "With most homeowners locked into significantly lower rates, refinance applications continued to run more than 80% below last year's pace, while the refinance share of applications was 28.6% – the fifth straight week below 30%." Of the total applications, the refinance share of mortgage activity was up four basis points to 28.6%, while the adjustable-rate mortgage share of activity decreased to 11.8%. The FHA share of total applications fell to 13.5%, the VA share dropped to 10.3%, and the USDA share of total applications remained unchanged at 0.5% from a week ago. "Apart from the ARM loan rate, rates for all other loan types were more than three percentage points higher than they were a year ago," Kan said. "These elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales." According to the National Association of Realtors, pending home sales in September tumbled 10.2% from August and were down 31% from a year ago. New home listings also dwindled annually since many homeowners were holding on to the ultra-low mortgage rates they locked in during the housing boom. Overall housing starts declined as well, to a seasonally adjusted rate of 1.44 million in September. What does the increase mean for the interest-rate-sensitive housing market? Experts answer.
The US Federal Reserve raised interest rates by another 75 basis points as its war against inflation rages on. This is the Fed's fourth consecutive 0.75% rate hike, and chairman Jerome Powell warned it might have to continue increasing. "Financial conditions have tightened significantly in response to our policy actions, and we are seeing the effects on demand in the most interest-rate-sensitive sectors of the economy, such as housing," Powell said. "It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. At some point, it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal." Housing industry experts were not surprised by the move. "As widely expected, the Federal Reserve hikes the federal funds rate by 75 basis points, its sixth straight hike, but hints at a possible slowdown in the pace of increases," said First American deputy chief economist Odeta Kushi. "In the interest-rate sensitive sector of housing, that policy is working – the housing market is cooling from the red-hot pace of the past two years. In other corners of the economy, especially the labor market, the Fed is not yet seeing the same swift pullback in demand." "Mortgage rates remain above 7%, which has caused refinance activity to effectively stop and home purchase activity to slow markedly," said Mike Fratantoni, chief economist of the Mortgage Bankers Association (MBA). "The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability. The volatility seen in mortgage rates should subside once inflation begins to slow, and the peak rate for this hiking cycle comes into view." Keller Williams chief economist Ruben Williams said the housing market appears well-positioned to weather slower activity but is unlikely to improve until mortgage rates become more stable. Kushi agreed: "High inflation and rising rates hurt household budgets, but 66% of households have an inflation hedge – housing. Many owners locked in low rates on 30-year, fixed mortgages. Combined with a strong labor market, consumers are feeling confident enough to continue spending." "The housing recession is here," said Marty Green, principal at Polunsky Beitel Green. "The big question now is how quickly it spreads to the rest of the economy." According to Fratantoni, MBA expects the Fed to pump interest rates by another 75 basis points before holding them steady throughout 2023. |
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