Refinancing and Delinquencies Soar in Divided Mortgage Era

(Bloomberg) -- The U.S. mortgage market shows a widening gap between winners and losers as affluent borrowers take advantage of record-low rates while protracted unemployment drives serious delinquencies to their highest levels since 2010.

About 2.25 million mortgages were at least 90 days late in July, a 450% increase from pre-pandemic levels and the biggest number since the global financial crisis, according to industry tracker Black Knight Inc.

Meanwhile, new mortgage originations reached a record $1.1 trillion in the second quarter. Rates on 30-year home loans slipped below 3% for the first time in history in July, enabling more homeowners with the ability to refinance to save hundreds of dollars a month.

There are still nearly 18 million homeowners with good credit and at least 20% equity who stand to cut at least 0.75% off their current rate by refinancing, according to Ben Graboske, president of Black Knight data and analytics.

“We would expect near-record-low interest rates to continue to buoy the market,” he said in a statement Tuesday.

The diverging trends illustrate how government intervention is aiding many financially secure households while the more vulnerable face mounting threats to their homeownership as the pandemic continues to batter the U.S. economy. Real estate made up $30.3 trillion, or 24% of total U.S. household wealth, in the first quarter, according to the Federal Reserve.

“The money is in the homes and people with college education are still working, but the pain is being felt where people are unemployed,” Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania, said in an interview. “Covid-19 will drive an increase in the already high income-inequality gap, and wealth inequality, actually, which is much more extreme.”

While the unemployment rate fell to 8.4% in August, more than 11 million jobs were still lost in the pandemic, the Labor Department reported last week. Supplemental benefits for the unemployed of $600 a week expired in July and Congress has been at an impasse over a follow-up aid package.

The quarterly jump in new mortgage originations occurred despite public health measures that limited home showings, appraisals and in-person document signings. Refinancing made up about 70% of the new home loans during the period.

Monthly principal and interest payments on a $400,000 mortgage would be $1,686 at 3%, compared with $1,910 at 4% -- an annual savings of $2,688. The average 30-year mortgage rate was 2.93% last week, according to Freddie Mac.

Other data reported by Black Knight:

• More borrowers with ability to refinance are using their equity to get cash. About $44.5 billion in equity was tapped through cash-out refinancing in the second quarter, the most in more than a decade.
• Markets with the biggest delinquency increases in July were Miami, Las Vegas, Orlando, New York and New Orleans.
• The number of homeowners in forbearance continued to fall last week and is down by 1 million from its May peak. But the July 31 expiration of extra unemployment benefits means this month “may provide the true test,” Black Knight said in a Sept. 4 report.
• Homeowners with less equity and lower credit quality were more than twice as likely to have entered forbearance plans. About 11.5% of loans by the Federal Housing Administration and Department of Veterans Affairs were in forbearance last week, compared with 5.1% for Fannie Mae and Freddie Mac borrowers, who have better credit and more equity in their houses.

©2020 Bloomberg L.P.