Volume 147 | July 20, 2023

Guardian Asset Management

Weekly Newsletter

Guardian endeavors to provide you with the latest in housing, industry and market news from Washington D.C. and around the country. It is our goal as your industry partner to be informative, relative and topical.

From the General

Counsel's Desk

A fight erupts in U.S. housing market as deteriorated affordability clashes with the ‘lock-in effect’

In a clash of opposing forces, the U.S. housing market finds itself embroiled in a fierce battle. On one side, deteriorated affordability resulting from a spike in mortgage rates from 3% to over 6% in 2022, just after national home prices surged by more than 40% during the Pandemic Housing Boom, is exerting downward pressure on home prices. On the other side, the scarcity of existing inventory, exacerbated by the “lock-in effect,” as many homeowners are reluctant to sell and buy anew, fearing the tradeoff from a 2% or 3% mortgage rate to one in the 6% to 7% range, is exerting upward pressure on home prices.

Housing economists say neither force should be ignored.

Four years of housing market gridlock? Goldman Sachs issues U.S. home price predictions through 2026

In the summer of 2020, something counterintuitive occurred in the housing market. Despite the unemployment rate remaining in double digits, the market underwent a significant shift, transitioning into a boom. This surge was a direct result of the remote work trend, which generated a heightened demand for housing space. Notably, between the summer of 2020 and 2022, household formation exceeded expectations by 2.2 million, as individuals sought to separate from crowded roommate situations, and financially stimulated millennials embarked on independent living arrangements. The surge in housing demand during the pandemic was so substantial that Federal Reserve researchers estimated that housing supply would have needed to increase by a staggering 300% in order to match that elevated housing demand.

Clearly, housing supply never matched the surge in demand, leading to an overheating of U.S. home prices. From March 2020 to June 2022, the Case-Shiller National Home Price Index recorded a staggering increase of 43.3% in U.S. home prices. According to researchers at the Federal Reserve Bank of San Francisco, more than 60% of these gains can be directly attributed to the heightened demand triggered by work-from-home policies.

Fast forward to 2023, and the mortgage rate shock has clearly stopped the overheating—national house prices in April as tracked by Case-Shiller remain 2.4% below the June 2022 peak—however, we haven’t seen a huge give-up. The vast majority of pandemic house price gains remain, and that’s true even in Western markets that were hit hard by last year’s housing correction.

Does the recent house price stabilization indicate that the window to relinquish some of the gains from the Pandemic Housing Boom has closed? Moreover, does this stabilization suggest that national home prices have already returned to normal levels of growth?

Many mortgage lenders are like frogs in a slow boil

The dour housing market over the past 18 months has thrust struggling independent mortgage lenders (IMBs) into what seems like a pot of water that is coming slowly to a boil.

As the heat rises, so too does the number of lenders seeking to exit the market. The trajectory of merger and acquisition (M&A) deals bears that reality out.

The pace of M&A deals in the IMB market in 2022 and projected for 2023 combined is expected to be more than double the mark set during the unicorn lending years of 2020 and 2021, according to one recent industry analysis. And that excludes the count of lenders who have or soon will exit the market silently, off the radar of public records. 

Garth Graham, senior partner at the STRATMOR Group overseeing mortgage-lender merger and acquisition (M&A) activities, said in 2020 and 2021 there was a total of 43 M&A deals involving IMBs with annual origination volume of $500,000 or more. Last year that figure hit 50 deals, and for 2023 STRATMOR projects there will be at least 60 such M&A deals — for a total of 110.

People who entered plans to postpone payments for pandemic hardships were just as likely to be in what might be considered an optimal scenario as a worst-case one when they exited.

The percentage who kept paying while in forbearance was 17.9% between June 1, 2020 and June 30, 2023 and the percentage was the same for those who left plans delinquent with no immediate foreclosure-prevention plan in place, according to the Mortgage Bankers Association.

The consistency of the matching shares in these categories at the three-year mark for the MBA's now-monthly Loan Monitoring Survey data set suggest that they'll be a benchmark for the performance of pandemic forbearance, which has now largely run its course.

The largest percentage or 29.5% of borrowers opted to set payments missed during forbearance aside for later repayment through vehicles like a deferral or partial claim, but that share was a little lower than the previous month, when it was 29.6%.

The share of borrowers with other outcomes like modifications that make loan terms more affordable (alone or in combination with other types of foreclosure prevention), reinstatements or payoffs through refinances or home sales generally matched numbers the previous month.

Less than 1% of borrowers entered repayment plans. An even smaller share below 0.5% sold homes for less than their debt was worth in short sale or turned them over to mortgage institutions without entering foreclosure in a deed-in-lieu transaction.

Short-term mortgage delinquencies rose

after the first quarter: FHFA

The near-term performance of mortgages backed by government-sponsored enterprises wavered a little as the second quarter got underway but loss mitigation stopped some borrowers from proceeding to foreclosure.

The share of homeowners late by 30 to 59 days rose to 0.91% or 281,681 by loan count in April from 0.71% or 218,409 in March, according to a Federal Housing Finance Agency report released last week. Delinquencies, including those in this category, fell in the first quarter.

The 90- and 60-plus day delinquency rates remained relatively stable in April at 0.59% and 0.75%, respectively, while foreclosure starts fell to 17% to 5,604 from 6,732. 

The majority or 77% of financially troubled borrowers who got modifications opted for term extensions in a market where prevailing interest rates have often been higher than those at origination. Another 18% used principal forbearance.

Mortgages backed by the two GSEs the agency oversees, Fannie Mae and Freddie Mac, tend to have relatively low delinquency rates compared to other categories of loans.

Across the board, borrowers with financial troubles were leaning more heavily on state-distributed money from the Homeowner Assistance Fund in the first quarter.

Money dispensed through the fund rose 50% to $1.2 billion on a consecutive-quarter basis, in line with its goal of providing increasing support to distressed borrowers as part of the transition away from pandemic-related relief, according to a recent U.S. Treasury report.

In total, around $3.7 billion has been paid out. While most states still have the majority of their funds outside of those used for administrative purposes left to distribute, at least 14 (and two U.S. territories) have expended more than half.

Housing market stuck in biggest freeze in a decade

Those looking for new neighbors will be disappointed to learn that the housing market is in its deepest freeze in a decade.

In the first half of the year, only 14 out of every 1,000 homes in the country were sold, according to a report from Redfin. That’s equivalent to about 1 percent of the nation’s housing stock, the lowest turnover rate in at least a decade.

In the same period prior to the pandemic, 19 out of every 1,000 homes changed hands.

The report named frequently cited roadblocks, like pandemic-era low mortgage rates and remote work that kept inventory levels low. Mortgage rates have surged in the last year, sidelining buyers who can’t afford the rates and sellers who don’t want to sacrifice the rate they obtained at a more favorable time.

Mortgage rates would have to drop closer to 5 percent to free up some inventory, Redfin deputy chief economist Taylor Marr said. Other ideas to raise inventory and create a more robust market include increased home construction, zoning reforms and tax incentives for buyers and sellers.

Large suburban homes have taken the biggest hit in terms of turnover rate since the pandemic. Roughly 16 of every 1,000 four-bedroom suburban homes sold in the first half of the year, versus 24 of every 1,000 in the first half of 2019. That being said, the turnover rate has fallen in the past four years for every home size in every type of neighborhood.

An Improvement in Financial Health Pushes Forbearance Volume Down in June

The Mortgage Bankers Association’s (MBA) monthly Loan Monitoring Survey revealed that the total number of loans now in forbearance continued to fall in June, decreasing five basis points from 0.44% of mortgage servicers’ portfolio volume in May 2023 to 0.49% as of June 30, 2023.

The MBA estimates that 220,000 homeowners are currently in forbearance plans, and nationwide, mortgage servicers have provided forbearance plans to approximately 7.9 million borrowers since March 2020.

In June 2023, the share of Fannie Mae and Freddie Mac (GSE) loans in forbearance decreased two basis points from 0.23% to 0.21%. Ginnie Mae loans in forbearance decreased 13 basis points from 1.06% to 0.93%, and the forbearance share for portfolio loans and private-label securities (PLS) decreased six basis points from 0.58% to 0.52%.

“Mortgage forbearance has declined because most homeowners have maintained or improved their financial health,” said Marina B. Walsh, CMB, MBA’s VP of Industry Analysis. “Recent reporting by the U.S. Bureau of Labor Statistics shows continued job growth in June, and a 3.6% unemployment rate. The employment situation tracks with homeowners’ ability to make mortgage payments.”

When stating the reason for their forbearance, 78.3% of borrowers stated they were in forbearance due to COVID-19-related reasons. Another 6.1% were in forbearance due to a natural disaster. The remaining 15.6% of borrowers are in forbearance for other reasons, such as a temporary hardship caused by job loss, death, divorce, disability, etc.

By stage, 34.9% of total loans in forbearance were in an initial forbearance plan stage, while 54.5% were in a forbearance extension. The remaining 12.6% were forbearance re-entries, including re-entries with extensions.

Of the cumulative forbearance exits for the period from June 1, 2020, through June 30, 2023, at the time of forbearance exit:

• 29.5% resulted in a loan deferral/partial claim.
• 17.9% represented borrowers who continued to make their monthly payments during their forbearance period.
• 17.9% represented borrowers who did not make all of their monthly payments and exited forbearance without a loss mitigation plan in place yet.
• 16.1% resulted in a loan modification or trial loan modification.
• 10.8% resulted in reinstatements, in which past-due amounts are paid back when exiting forbearance.
• 6.6% resulted in loans paid off through either a refinance or by selling the home.
• The remaining 1.2% resulted in repayment plans, short sales, deed-in-lieus or other reasons.

ATTOM’s just released Mid-Year 2023 U.S. Foreclosure Market Report shows there were a total of 185,580 U.S. properties with foreclosure filings in the first six months of 2023. According to the report, that figure is up 13 percent from the same time period a year ago and up 185 percent from the same time period two years ago.

ATTOM’s latest foreclosure activity analysis reported that states that saw the greatest increases in foreclosure activity compared to a year ago in the first half of 2023, included Maryland (up 100 percent); Oregon (up 99 percent); Alaska (up 95 percent); West Virginia (up 83 percent); and Arkansas (up 72 percent).

Also according to the report, nationwide, 0.13 percent of all housing units (one in every 752) had a foreclosure filing in the first half of 2023. The report noted that states with the highest foreclosure rates in the first half of 2023 were Illinois (0.25 percent of housing units with a foreclosure filing); New Jersey (0.24 percent); Maryland (0.23 percent); Delaware (0.23 percent); and Ohio (0.20 percent).

ATTOM’s Mid-Year 2023 foreclosure analysis also reported that there were a total of 97,608 U.S. properties with a foreclosure filings during the second quarter of 2023, up 2 percent from the previous quarter and up 8 percent from a year ago.

According to the report, nationwide, one in every 1,431 housing units had a foreclosure filing in Q2 2023. The report noted that states with the highest foreclosure rates were Maryland (one in every 721 housing units with a foreclosure filing); Illinois (one in every 772 housing units); New Jersey (one in every 776 housing units); Florida (one in every 904 housing units); and Delaware (one in every 918 housing units).