Tag Archives: Mortgage loan

CR: Housing bubble: The “Wealth” is Gone, but the Debt Remains

Housing bubble: The “Wealth” is Gone, but the Debt Remains

by Bill McBride on 6/14/2013 02:00:00 PM

THE total wealth of American households has recovered from the financial crisis and Great Recession, according to the Federal Reserve Board. But … many Americans, particularly younger adults who took on heavy debt to acquire homes before the housing bubble collapsed, are lagging.

During the housing boom, said William R. Emmons, the chief economist of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, “exactly the people you would think need to act conservatively were doing the opposite.” Homeownership rates, and mortgage debt levels, rose for younger households, as well as for less educated and minority ones. Those groups suffered more during the crisis, he said, and have been slower to recover.Mr. Emmons compiled average wealth figures for different groups from the triennial surveys … older households are down just 3 percent on average, while those headed by middle-age people are down about 10 percent. But the decline is nearly 40 percent for the younger group.

During the housing boom, households ended up with more of their wealth in real estate than before, and mortgage debt rose to record levels relative to the size of the economy. The proportion of wealth in homes is now back to close to the level of the 1990s, but the debt levels remain high by historical standards.
emphasis added

Household Real Estate Assets Percent GDPClick on graph for larger image.

This graph based on the Fed’s Flow of Funds report shows household real estate assets and mortgage debt as a percent of GDP.

As Norris noted, the bubble wealth is gone, but the debt remains (still high on a historical basis). This was especially hard on younger households since they bought during the housing bubble.

Read more at http://www.calculatedriskblog.com/2013/06/housing-bubble-wealth-is-gone-but-debt.html#5ebCmySFJbleFrzC.99


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JCHS: Are More Older Americans Retiring with Mortgage Debt?

Are More Older Americans Retiring with Mortgage Debt?

 by Irene Lew
Research Assistant
As the first wave of baby boomers prepare for retirement, it would be easy to assume that they’ve paid off their mortgage and credit card debt. However, data from the Census Bureau’s Survey of Income and Program Participation(SIPP) shows that older Americans today are grappling with mounting debt levels, even into their retirement years.  Among households aged 55 to 64, total median household debt jumped from $42,654 in 2000 to $70,000 in 2011—a 64 percent increase—while households aged 65 and over are now carrying more than twice the amount of household debt they were carrying a decade ago.  Even more surprisingly, older Americans had a larger increase in total median household debt than younger households, with the amount of total median household debt among householders under the age of 35 growing by a relatively modest 13 percent between 2001 and 2011.

Note: Percent changes are based on 2011 dollars.
Source: US Census Bureau, Survey of Income and Program Participation (SIPP), 1996 and 2008 Panels. 

The increase in debt among older Americans has been driven by a spike in the number of households who hold secured debt, which includes mortgages and home equity loans, even into their retirement years. According to data from the Survey of Consumer Finances, the share of households aged 65 and over with mortgage debt has nearly doubled over the past 20 years, from 21 percent in 1989 to 40 percent in 2010; among households aged 55-64 during the same time period, the share grew from 46 percent of households in 1989 to 69 percent in 2010. Just between 2001 and 2010, there was a 10 percent increase in the share of households aged 55-64 with mortgage debt and a 14 percent increase in the share of households aged 65 and over with mortgage debt.

Source: JCHS tabulations of Survey of Consumer Finances. 

It’s not just that more seniors are carrying mortgage debt; they are also saddled with much higher mortgage debt than they were carrying 20 years ago.  Although the median mortgage debt of all homeowners who are still carrying mortgage debt has increased from nearly $54,000 in 1989 to $109,000 in 2010, among homeowners aged 65 and over there was a 76 percent increase in the median amount of mortgage debt, from $15,180 in 1989 to $63,000 in 2010 (after adjusting to 2010 dollars).

While the dramatic rise in the share of older Americans with mortgage debt is partly the result of easily-accessible credit before the Great Recession (when many Americans took out home equity loans, extended mortgage terms, or refinanced their homes and took out cash), there is also evidence that older households were not spared from the Great Recession. A 2011 AARP studypoints out that, post-recession, a larger share of older homeowners with mortgages, particularly those with incomes below $23,000, are paying 30 percent or more of their income for housing costs. In fact, 96 percent of homeowners aged 50 and older with mortgages, who have incomes under $23,000, pay 30 percent or more of their income for housing.

Furthermore, a recent report from the Consumer Financial Protection Bureau (CFPB) indicates that more senior households are taking out reverse mortgages. According to the report, 70 percent of reverse mortgage borrowers in 2010 opted to take the full amount of the loan as a lump sum at closing, up from just 2 percent of borrowers in 2008. While data is not available on how they use these funds, this dramatic increase raises concerns about whether borrowers will have sufficient financial resources to cover their expenses later in life.

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PIMCO: The U.S. Housing Market’s Road to Recovery: Slower Speed Limits and Stricter Enforcement

The U.S. Housing Market’s Road to Recovery: Slower Speed Limits and Stricter Enforcement

Michael CudzilDaniel H. Hyman

Picture a six-lane highway with roughly 110 million cars. The posted speed limit is 55 miles per hour, but there is not a police officer in sight. Since there have not been any major accidents in years, it is common practice to travel at 90 miles to 100 miles per hour, and insurance companies are lowering their premiums – often regardless of the state of the cars.

That describes the U.S. mortgage market from 2003 to 2006. The story ended exactly as you would imagine: a massive accident with severe repercussions not just for housing, but also for the financial system and the global economy.
Today, the six-lane highway has been reduced to three lanes, as origination capacity has been halved. One is a fast-pass lane for customers who have been sitting in traffic the past couple of years and are now being rewarded for good behavior with access to historically low mortgage rates: the HARP lane. (The Home Affordable Refinance Program helps homeowners refinance who are underwater or near-underwater but current on their mortgages.) But for everyone else, the speed limit has been reregulated to 35 miles per hour. There are police officers at every mile marker, and the insurance companies are charging much higher premiums.
Where do we go from here?
Despite fewer lanes on the mortgage highway, we believe the U.S. housing market has bottomed and is showing clear signs of a gradual and broadening recovery. The upward trajectory of housing prices should continue at a moderate pace. Over the past 100 years, housing has appreciated at roughly the rate of inflation. It is only in the past 10 years that housing has traded with substantial volatility due to leverage and “affordability” products. We believe the tailwinds are in place for an 8%–12% appreciation in housing over the next two years. Over the longer term, we expect a return to historical normal performance for housing relative to the rate of inflation.
We consider several dynamics in developing our outlook on housing: household formation, inventories, affordability and access to credit and lending.

Read More …

We remain constructive on the state of the housing market but recognize the road is far from smooth.
On balance, we believe the positives outweigh the negatives and look for housing to appreciate 8%–12% over the next two years. Housing should have positive influences on consumer confidence and labor mobility.
In terms of investment implications, we believe both agency and non-agency markets offer opportunities to generate excess returns, while active management should be able to add value to structural allocations. Agency mortgage securities offer liquid investments that can be traded against each other as well as against other liquid interest rate markets, specified mortgage pools and, less frequently, structured mortgage products.
Non-agency mortgages continue to offer the best risk-adjusted returns in the sector, but specific security selection will matter much more given their recent high returns. Compared to investing directly in real estate, which requires time to close, lawyers, insurance and transaction costs, non-agency mortgages offer similar returns without the friction. Pairing non-agency mortgages with agency mortgage-backed securities potentially provides an attractive return profile across a wide range of economic outcomes.

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JCHS: How Much Did LTVs Actually Rise During the Housing Boom?

How Much Did LTVs Actually Rise During the Housing Boom?

The rise in housing prices that appears to be taking hold in many parts of the country is an important sign of recovery in the market. Among the many ways the upturn in prices is helping the housing market heal is by turning back the tide on the 100-year flood of underwater mortgages.  Still, even as reports from CoreLogic and Zillow document the progress in reducing the inventory of homes with negative equity, these same reports remind us that despite recent improvements there are still millions of housing units saddled with mortgage debt exceeding the value of the home. These homes serve as a warning about the risks of excessive loan to value ratios (LTVs) that are assumed to have become commonplace among homeowners during the housing boom. However, a review of data from the Survey of Consumer Finances (SCF) from the last 20 years finds that there was actually relatively little change in the distribution of LTVs through the boom years.  While outstanding mortgage debt did increase substantially, it essentially kept pace with the rise in home prices. The flood of underwater owners was thus less the result of a greater share of owners having little equity cushion and more the result of the tremendous collapse in housing prices.Figure 1 shows  trends in the distribution of LTVs among all homeowners between 1989 and 2010, based on a comparison of total outstanding mortgage debt to owners’ estimates of the value of their principal residence. As shown, there was a fairly substantial increase in the average LTV between 1989 and 1995 from 27 percent to 34 percent. This rise reflects a combination of factors, including the greater tendency of households to hold mortgage debt in the wake of the 1986 Tax Act that gave preferential treatment to mortgage interest payments, the sharp fall in house prices in some areas of the country, and an expansion of mortgage lending that occurred as the economic boom of the 1990s began. However, between 1998 and 2007 the average remained largely unchanged at about 37 percent. Average mortgage debt did increase sharply over this period, from $67,000 to $111,000 (in constant 2010 dollars) but the average house value also increased substantially from $185,000 to $317,000. Even at the peak of the boom, the vast majority of owners still had fairly low LTVs.


Source: Joint Center tabulations of Survey of Consumer Finances.

Of course, these averages include a large share of households that continued to hold little or no mortgage debt. The stable average may result from a rise in high LTVs among some owners that is counterbalanced by plunging LTVs for those who did not tap their growing home equity. But there was also little change in the level of LTVs at the upper end of the distribution. As Figure 1 illustrates, at the 75th percentile of owners LTVs also remained largely unchanged between 1998 and 2007 at roughly 67 percent. Even at the 90th percentile of the distribution LTVs held steady at 86 percent.  Thus, even at the height of the housing boom the vast majority of homeowners had at least a 15 percent equity cushion, as they had continuously since the mid 1990s.
The data in Figure 1 includes homeowners of all ages, but it might be expected that highly leveraged homeownership was becoming more common among younger households who were more likely to buy homes during the boom years and take advantage of more liberal lending. Figure 2 shows the same distributions of LTVs for homeowners under age 30. While there is more sampling variability for this subgroup, there does appear to be more of a rise in average LTVs among this group than is true of all households. Between 1995 and 2001 the average LTV was generally a little above 60 percent, but rose to more than 65 percent in 2004 and 2007. A similar increase was evident at the 75th percentile where LTVs reached about 90 percent during the boom years after having been closer to 85 percent during the 1990s. Still, the vast majority of young homeowners had at least 10 percent equity invested in their homes even when lending standards were most relaxed. There was more stability at the 90th percentile of the distribution, where young homeowners had LTVs of between 95 and 98 percent consistently since 1989. At this upper point of the distribution young homeowners did have little equity in their home, but this was no different during the boom than it was 20 years ago.


Source: Joint Center tabulations of Survey of Consumer Finances.

As both Figures 1 and 2 illustrate, when the bottom fell out of the housing market after 2007 LTVs among homeowners shot up.  According to estimates from the SCF, 9 percent of all homeowners were underwater on their principal residence as of 2010, with the rate more than twice as high among those under age 30. But this sharp rise in LTVs was the result of the unprecedented fall in house prices and not due to an expansion of excessively high LTVs during the boom.
Still, there is no question that homeowners took on much more debt than was prudent during the boom. While outstanding mortgage debt may have been keeping pace with house prices, the level of debt was greatly outracing trends in incomes. This great expansion of credit decoupled from borrowers’ incomes certainly played a role in helping to inflate the housing bubble. The new Qualified Mortgage (QM) standard is designed to avoid this problem in the future by establishing an ability to pay standard for mortgage lending. Notably, the QM standard did not include restrictions on LTVs. However, the still to be announced rules defining the Qualified Residential Mortgage (QRM) may introduce limits on LTVs. While it is true that a greater equity cushion would have helped both homeowners and lenders avoid losses during the housing crash, the housing market has long been characterized by fairly high LTVs at the upper end of the distribution. These higher LTVs were not problematic as long as house prices were not subject to extreme swings. Imposing more stringent LTV requirements are of concern as they will curtail the ability of young households to get a start as homeowners—particularly the growing share of young minority households who have not benefited to the same degree from having parents build wealth through homeownership. Given these concerns, it may be best to have regulatory efforts focus on ensuring that borrowers can afford their mortgages as a means of introducing more stability in the mortgage system, rather than on setting standards for LTVs meant to withstand the next 100-year flood.

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Read of the Day: A Thousand Bucks Buys You a Lot of House Right Now

A Thousand Bucks Buys You a Lot of House Right Now

by Ben Engebreth — Department of Numbers


The chart below shows the increasing amounts of money you’re able to borrow on a 30-year fixed rate mortgage with a $1,000 payment since 1971. I’ve been meaning to create this chart since I saw Matt Yglesias’ post last month on the buying power of $1,000 over the last few years. As you can see, the trend isn’t new. The amount that $1,000 buys you (in 2012 dollars) with a 30-year fixed rate mortgage has grown from roughly $64,000 in 1981 to $226,000 last month!

Of course the high rates of the early 1980s were as much of an anomaly as low rates are today. But even compared to the 6-8% 30-year mortgage rate range that prevailed in the 1990s, $1,000 still buys you about $75,000 more now.

But there’s a limit to how far left we can move on the chart below. The 30-year fixed was 3.38% last month. I wouldn’t have imagined it could ever get that low, but certainly we won’t ever see 1% or even 2% rates. There really can’t be much more oomph left in the price stimulus provided by falling mortgage rates.

Which brings me back to this chart of Case-Shiller real home prices and the financing cost of Case-Shiller real home prices that I showed a couple of months ago.

We’ve seen a huge drop in real home prices since 2005 and have only recently found a floor and stabilization. But when you look at the payments on homes purchased with borrowed money (the blue real borrowing cost line), the cost in terms of a monthly mortgage payment continues to decline because mortgage rates continue to hit new lows. In terms of the monthly mortgage payment, homes cost less than they ever have for the history of the Case-Shiller series. Truly, $1,000 buys you more home than it has in quite a while. You know, assuming you can get a mortgage.

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Read of the Day: Hidden Housing Subsidy May Soon Come Out Of Hiding

Hidden Housing Subsidy May Soon Come Out Of Hiding


November 16, 2012

The federal government has all these ways of paying people to buy houses without actually, you know, paying people to buy houses.

We’ve talked a lot about two examples of this:

1. The mortgage-interest tax deduction is effectively a government payment to people who are paying a mortgage.

2. Fannie Mae and Freddie Mac allow home buyers to get below-market-rate mortgages. They blew up in the housing bust, requiring a massive federal bailout.

We haven’t talked so much about a third example of a federal housing subsidy that doesn’t seem like a subsidy: the Federal Housing Administration, aka FHA.

Like Fannie and Freddie before the housing crisis, FHA has always funded itself. And, like Fannie and Freddie after the crisis, FHA may soon need a taxpayer bailout. An audit of FHA released today found that the agency is $16 billion in the hole.

The FHA doesn’t actually make loans. It guarantees them. If you get an FHA-backed mortgage and don’t pay it back, the FHA has to make up the difference. The FHA requires everyone who gets an FHA loan to buy insurance, which is supposed to cover losses when borrowers default.

But the system only works if the FHA prices the insurance correctly. And it appears that, during the early part of the housing bust, the FHA did not collect enough in premiums to pay off losses it will incur in the coming years.

The trouble is likely to come from loans made in 2008 and 2009. At that time, it became increasingly difficult to get a private loan. So more and more borrowers turned to FHA-backed loans, and the agency wound up backing hundreds of billions of dollars in mortgages.

On top of that, FHA loans require only a tiny down payment — as little as 3.5 percent. As a result, when housing prices decline, borrowers very quickly end up owing more than their home is worth. This dramatically raises the risk of default.

The agency has been raising the premiums it charges, among other steps, to try to fix the problem. But today’s audit suggests that those steps haven’t plugged the hole. FHA will probably need taxpayer money to make good on the promises it made as the housing market was collapsing.

FHA-backed mortgages

Source: Inside Mortgage Finance

Credit: Lam Thuy Vo

Update: FHA today announced several new steps it’s taking to try to plug the hole in its finances. Details here.

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Read of the Day: Fed Chairman Bernanke on Mortgage Lending

Fed Chairman Bernanke on Mortgage Lending

by Michael Neal —Eye on Housing

In prepared comments, the Chairman of the Federal Reserve System, Ben Bernanke, addressed the challenges in housing and mortgage markets. Chairman Bernanke’s comments contained a clear message: tight lending standards that emerged after the housing boom are now holding back the housing market recovery and the economy as a whole.

“It seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

As part of these remarks, the Chairman noted the central role played by the housing sector within the overall economy. After reaching a low, many housing market indicators including startssales, and prices now indicate that the housing market is beginning to recover. However, the Chairman noted that “while it is encouraging that we are seeing signs of improvement in the housing market in most parts of the country….the housing sector is far from out of the woods”. He highlighted the mortgage market as a key component of housing still showing signs of strain. Addressing frictions in the mortgage market can consolidate gains made elsewhere in the housing sector.

Weakened mortgage demand partly accounts for declines in mortgage lending. The Chairman noted that “the reduction in mortgage originations and home purchases for all groups relative to the pre-crisis period partly reflects weakness in the effective demand for housing.” Analysis of the October Federal Reserve Board’s Senior Loan Officer Opinion Survey illustrate that demand for prime residential mortgages is growing, on net. However, the actual increase has beenslight, implying that growth in sales of single-family residential homes may reflect the growing role played by all-cash sales.

The Chairman noted that “while the decline in the number of willing and qualified potential homebuyers explains some of the contraction in mortgage lending of the past few years…tight credit nevertheless remains an important factor as well.” Analysis of the most recent release of the Federal Reserve Board’s Senior Loan Officer Opinion Survey confirms this point. The October survey continues to illustrate that lending standards affecting the supply of prime residential mortgages remain basically unchanged at still tight levels while demand for prime residential mortgages is strengthening. On net, survey respondents indicated that obtaining a prime residential mortgage has become slightly easier over the past three months. In the October survey, 4.7% of respondents indicated that they had eased their lending standards, while 3.1% of banks reported having tightened them. However, this change was small and the vast majority of firms, 92.2% kept their lending standards basically the same. Although banks may be reluctant to finance residential home purchases, the likelihood that they will extend credit for other consumer loans is growing.

The Federal Open Market Committee, also chaired by Bernanke, has taken extraordinary steps to lower mortgages rates. In his speech, Chairman Bernanke further clarified that “the actions taken by the FOMC to put downward pressure on longer-term interest rates was meant to inspire greater confidence for individuals, families, businesses, and financial markets” and he reiterated the commitment of the Federal Reserve to “promoting a sustainable recovery within the context of price stability until the job market improves substantially.”

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