The new Mortgage Monitor Report from the Data & Analytics division of Black Knight explains that as COVID-19 continues to wreak havoc on the U.S. economy, “any attempt to quantify potential delinquencies from the current situation is challenging, as there have been no true corollaries in history.”
“Trying to gauge the impact of COVID-19 on mortgage performance is as much an art right now as a science,” says Ben Graboske Black Knight Data & Analytics president. “The fact is that there is no true point of comparison in the nation’s recent history for analysts to model against.”
The closest example is the Great Recession. At that time, the number of delinquent mortgages tripled over four years (by more than 5.5 million) as the unemployment rate rose from 4.5% in 2006 to 10% by the end of 2009. If the unemployment rate reaches the 32% projected by the Federal Reserve Bank of St. Louis, the delinquency rate could hit 19%, with 10 million homeowners past due on their mortgages.
“The various forbearance programs being offered to borrowers via the recently passed CARES Act, as well as via individual agencies and mortgage servicers, are a key difference today,” Graboske explains. “Although, should financial disruptions become more long-term, additional assistance programs may become necessary. Of course, a surge of forbearance requests brings its own challenges, both operational and financial.”
The report also looks at the impact recent interest rate volatility has had on everything from home affordability and refinance incentive to home purchasing power. Market uncertainty has resulted in the spread between 10-year Treasury yields and 30-year fixed interest mortgage rates expanding significantly in recent weeks.
Historically, the two move in relative tandem, but surges in refinance applications, which have overwhelmed originator supply chains along with uncertainty in the secondary markets, have resulted in 30-year rate increases and widening spreads. Such interest rate volatility has had a whipsaw effect on refinance incentive, with the number of homeowners who could both likely qualify for and benefit from a refinance growing as high as 14.3 million at the start of March, to as low as 3.3 million by March 12 and back to 10 million as of March 24.
Purchase demand, which has been hampered by economic uncertainty and social distancing efforts in recent weeks, is also experiencing downward pressure from recent interest rate volatility. After seeing home affordability improve to its strongest level in more than three years, with 30-year rates falling below record lows in early March, recent jumps in 30-year rates have significantly shifted the affordability landscape, seemingly on a daily basis.
The payment required to purchase the average-price home has fluctuated by more than 13% over the past two weeks, making it difficult for prospective buyers to gauge how much home they qualify to purchase and creating challenges for those under contract to decide when to lock in their rate.
For example, the buying power of a prospective home buyer who qualified for a $1,000/month mortgage payment with 20% down rose from $270,000 at the start of the year to $292,000 on March 2 – when 30-year rates fell to 3.13%. When rates hit 4.15% two weeks later, that same borrower would have only qualified for a $258,000 home purchase – a $34,000 reduction in buying power.
For more details from the report, click here.