CALCULATEDRISK
By Bill McBride
Press Release: ICE Mortgage Monitor: Positive Signs in Housing, Mortgage Markets Ahead of Spring Homebuying Season
- Affordability has improved along with rates in recent months, with the share of income required to purchase the median home falling nearly 5 percentage points from October’s 28-year high
- The national inventory deficit also improved for the 7th consecutive month which, along with improved affordability, points to a better housing market environment in coming months
- The ICE Home Price Index for December reported an annual growth rate of +5.6%, up from +5.1% in November, which at first glance suggests an accelerating housing market
- That acceleration, however, is a residual effect of last spring and summer’s strong run of growth, with more recent data suggesting that growth rate will begin to cool in coming months
- Lower interest rates have also begun to increase refinance incentive, albeit slowly, with more potential on the horizon, particularly among the 4.3M mortgages originated in 2023
- Of the 2023 vintage, 46% (2M) would be able to cut their first lien rate by 75 bps if 30-year rates fall to a projected 6% by year’s end, with 33% able to save a full percentage point or more
- Mortgage holders gained $1.6T in equity in 2023 to reach an aggregate $16T, the highest year-end total on record, two thirds of which is held by borrowers with credit scores of 760 or higher
- The average mortgage holder now has $299K in equity, $193K of which is “tappable” and could be withdrawn while still maintaining a healthy 20% equity stake
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Low Credit Score Originations
There have been very few low credit score mortgage originations. During the housing bubble, many of the low credit score loans were made through the private-labeled securities market.
• In the absence of any meaningful private-labeled securities market, the rise in FHA delinquencies is worth watching, as FHA and VA loans can be early indicators of broader mortgage performance trends
• While low credit score lending hit a record low, by count, in 2023, 90% below the years leading up to the great financial crisis, FHA and VA products have accounted for roughly 70% of sub-660 credit score lending for most of the past decade
• This is a stark contrast from the 2004-2006 era when FHA and VA lending played a minimal role (<10%) in lower credit score lending, which then was dominated by loans backed by private-labeled securities and held in portfolio
• Given the low volume of sub-660 credit score lending and that overall delinquencies remain historically low, FHA and VA delinquencies are not currently a cause for significant broad based market concern, but are worth keeping a close eye on for those invested in GNMA securities as well as non-banks that participate more heavily in FHA and VA lending
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Foreclosure Inventory is Low
There is very little foreclosure inventory.
• Foreclosure starts decreased -17.9% in December to 24K, equal to 5.2% of serious delinquencies, the lowest level since July 2022
• Active foreclosure inventory ticked down 5K (-2.2%) to 212K, still 25% (-71K) below pre-pandemic levels and the lowest since March 2022
• 5,400 foreclosure sales were completed nationally in December, down -17.2% from the month prior; this is the lowest level since February 2022, shortly after the end of the pandemic-related foreclosure moratoria
• With roughly 70% of all serious delinquencies currently protected from foreclosure, and overall serious delinquency volumes still historically low, foreclosure activity remains muted
• The prospect of any kind of near-term surge in foreclosure activity remains low, with start volumes still nearly 40% below pre-pandemic levels
Prepayment Activity Near All-Time Lows
• Prepayment activity, expressed as a single month mortality (SMM) rate, rose marginally (2 bps) in December with only 39 bps of SMM in the month, but remains near all-time lows, 2 bps lower than a year ago
• Prepayments due to the sale of a home, which account for more than half (56%) of prepayment activity, held flat in the month, still impacted by the October peak in interest rates
• Cash-out related prepays, accounting for 12% of all prepayment activity, slipped to a new record low of 4.48 bps as elevated rates continue to make the withdrawal of available equity a challenge
• Rate/term related prepays, which now make up less than 5% of prepayments, rose 19% from the month prior, but still remain low by historical standards
• Curtailment activity (partial prepayments) made up 23% of prepays in the month, driven by curtailments in 2023 vintage loans
Mortgage Delinquencies Increased in December
Here is a graph on delinquencies from ICE. Overall delinquencies increased in December but are still historically low.
• In large part due to December ending on a Sunday, delaying the processing of payments made on the last day of the month, the national delinquency rate hit 3.57%, up 19 bps from November
• Though the rise (+5.6%) was larger than an average December (+1.4%), it was milder than past Sunday-month-end Decembers, which have seen delinquencies jump +9.9% on average
• Delinquencies were up across the board, as inflows and rolls to later stages rose, while cures from both early and late stages improved
• Serious delinquencies (90+ days past due) rose to 475K, but were still 19% (-108K) below last year’s levels