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Refinance Boom Winds Down

Published by Anonymous (not verified) on Sat, 21/05/2022 - 3:34am in

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mortgages

 person signing papers with model house and keys on the table near them.

Total household debt balances continued their upward climb in the first quarter of 2022 with an increase of $266 billion; this rise was primarily driven by a $250 billion increase in mortgage balances, according to the latest Quarterly Report on Household Debt and Creditfrom the New York Fed’s Center for Microeconomic Data. Mortgages, historically the largest form of household debt, now comprise 71 percent of outstanding household debt balances, up from 69 percent in the fourth quarter of 2019. Driving the increase in mortgage balances has been a high volume of new mortgage originations, which we define as mortgages that newly appear on credit reports and includes both purchase and refinance mortgages. There has been $8.4 trillion in new mortgage debt originated in the last two years, as a steady upward climb in purchase mortgages was accompanied by an historically large boom in mortgage refinances. Here, we take a close look at these refinances, and how they compare to recent purchase mortgages, using our Consumer Credit Panel, which is based on anonymized credit reports from Equifax.

A Slowdown in Originations with a Sharp Drop in Refinancing

Mortgage originations were at $859 billion in the first quarter of 2022, a decline from the previous quarter and notably down from the high of $1.2 trillion reached in the second quarter of 2021.  However, purchase and refinance mortgages have followed different trends through the last two business cycles. In the chart below, we split refinance and purchase originations into their respective time-series. Mortgage refinances surged in the last two years, as many homeowners were able to take advantage of historically low interest rates. Purchase originations, mortgages associated with the new purchase of a property, increased at a steady pace. The beginning of 2022 shows a modest decline in purchase originations and a relatively sharp drop in refinances.

Purchase and Refinance Originations Decline in Q1:2022

Mortgage origination volume

Source: New York Fed Consumer Credit Panel / Equifax/

Next, we take a closer look at originations broken out into their two components – the number of mortgages originated and the average amount of the newly opened mortgages. We do this first, in the chart below, with purchase originations. The red line, which indicates the number of newly opened purchase mortgage accounts – has increased more moderately in the last two years. In fact, the number of new loans originated during the past two years was markedly lower than the numbers of new mortgages seen during any two-year period between 2000-06.  The first quarter of 2022 saw a decline even accounting for seasonal patterns in purchases originations, as the volume was lower than in the first quarter of 2021. The blue line depicts the average dollar amount of newly opened mortgages. As house prices have increased steeply during the past two years, this has increased as well, as homebuyers pay more – and borrow more – to finance the purchase of their homes. One component of home purchases not included here are those made with all cash – which according to a recent report from the National Association of Realtors are increasing in prevalence and comprised 28 percent of purchases of existing homes in March.

Number of Purchase Originations Shows Small Quarterly Decline

Source: New York Fed Consumer Credit Panel / Equifax.

Next, we decompose the volume of refinance originations in the same manner. The count of refinance originations is shown by the red line. The refinance boom during 2020 and 2021 was substantial, but at its peak was still only half the number of loans being refinanced per quarter during the historically large 2003 mortgage refinance boom. The red line suggests that the recent refinancing boom is effectively over, given the recent increases in mortgage rates and the fact that many borrowers who would benefit from a refinance have already done so.  The blue line, which charts the average dollar amount borrowed on newly refinanced mortgages, has also increased at a steep rate in the past two years. This rise is consistent with the impact of rising home prices on equity.

The Refinance Boom Winds Down as Mortgage Rates Begin to Pick Up

Source: New York Fed Consumer Credit Panel / Equifax.

Comparing Today’s Mortgage Market to 2007

The memory of the last housing boom and bust remains a troubling reminder for many Americans as home prices soar. The collapse of the housing market left significant financial scars on households–millions of whom were left owing more on their properties than they were worth, and with more than 10 million Americans experiencing a foreclosure. But there are many differences in the mortgage market now compared to 2007. First, unlike the 2003-06 housing boom, mortgage debt has been rising much more slowly than home values. As above, the number of mortgages originated remains far lower than in the early part of our time series, which would be even lower if population adjusted. And finally – loans being originated now are going to higher credit score borrowers; more than 70 percent of mortgages originated in the last two years were to borrowers with credit scores over 760, compared to 38 percent between 2003-06. Subprime mortgages remain effectively non-existent. With house prices continuing to rise and housing affordability a growing concern, there remain risks, and we will continue to monitor the evolution of the housing and mortgage market.

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Andrew Haughwout is a director in the Federal Reserve Bank of New York’s Research and Statistics Group.

Andrew Haughwout is a director in the Federal Reserve Bank of New York’s Research and Statistics Group.

Donghoon Lee is an economic research advisor in the Bank’s Research and Statistics Group.

Donghoon Lee is an economic research advisor in the Bank’s Research and Statistics Group.

Daniel Mangrum is a research economist in the Bank’s Research and Statistics Group.

Daniel Mangrum is a research economist in the Bank’s Research and Statistics Group.

Joelle Scally is a senior data strategist in the Bank’s Research and Statistics Group.

Joelle Scally is a senior data strategist in the Bank’s Research and Statistics Group.

Wilbert van der Klaauw is an economic research advisor in the Bank’s Research and Statistics Group. He is also the director of the Center for Microeconomic Data.

Wilbert van der Klaauw is an economic research advisor in the Bank’s Research and Statistics Group. He is also the director of the Center for Microeconomic Data.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

First-Time Buyers Were Undeterred by Rapid Home Price Appreciation in 2021

Published by Anonymous (not verified) on Sat, 21/05/2022 - 3:32am in

 young ethnic family looking at a home with house of sale sign and sold over it.

Tight inventories of homes for sale combined with strong demand pushed up national house prices by an eye-popping 19 percent, year over year, in January 2022. This surge in house prices created concerns that first-time buyers would increasingly be priced out of owning a home. However, using our Consumer Credit Panel, which is based on anonymized Equifax credit report data, we find that the share of purchase mortgages going to first-time buyers actually increased slightly from 2020 to 2021.

The housing market was very active last year. As shown below, new purchase mortgage volume increased for the tenth consecutive year since a low in 2011 following the housing bust. We classify a household as a first-time buyer (FTB) if there has never been a mortgage lien on their credit file prior to this purchase mortgage. This provides a more accurate measure of FTBs than the traditional measure, based on not owning a home in the past three years. The number of purchase mortgages originated by FTBs increased from 2.25 million in 2020 to 2.52 million in 2021—an 11.9 percent increase. In contrast, purchase mortgages originated by repeat buyers increased by a slower 7.5 percent—roughly half its 15 percent pace in 2020.

New Purchase Mortgage Volume Continues to Rise

Source: New York Fed Consumer Credit Panel/Equifax.

How did FTBs fare in 2021? As shown by the blue line in the chart below, despite the 19 percent increase in house prices nationally, the FTB share of purchase mortgages increased slightly to 48.3 percent as compared to 47.3 percent in 2020. Using our measure, the FTB share has been steadily rising over the last eight years and is moving closer to its maximum level over the past twenty years of 50.7 percent in 2010. When we divide housing markets by the extent of their house price increases over 2021, we did not find any relationship between the pace of house price increases and the change in the FTB share. Disaggregating by age, we found that the FTB share increased for all ten-year age groups up to age 59.

A broader measure of access to homeownership by FTBs is to look at FTBs as a share of all home purchases, not just those financed by a mortgage. Redfin calculates the percentage of home purchases that are made by all-cash buyers. These buyers include large institutional investors as well as individuals. According to Redfin’s data, cash purchases as a percentage of home purchases increased from 25.3 percent in 2020 to 30 percent in 2021. If we assume that all FTBs finance their purchases with a mortgage, then we can calculate the FTB share of all home purchases. As shown by the red line in the chart below, our broader measure of FTBs’ purchases as a share of all home purchases fell from 35.3 percent in 2020 to 33.8 percent in 2021.

First-Time Buyers’ Share of Mortgages and Home Purchases

Source: New York Fed Consumer Credit Panel/Equifax.

Given the strong increase in house prices, how did FTBs manage to maintain their share of purchase mortgages? As shown in the following chart, the surge in house prices in 2021 resulted in higher purchase mortgage balances for both first-time and repeat buyers. Mortgage balances increased by 13.3 percent for FTBs in 2021, exceeding the prior year’s increase of 8.6 percent.

Average Balance of Purchase Mortgage by Type of Buyer

Source: New York Fed Consumer Credit Panel/Equifax.

What matters is how these higher mortgage balances translate into monthly payments for households. Freddie Mac reports that the average thirty-year FRM mortgage rate in 2021 was 2.96 percent, down modestly from a rate of 3.11 percent in 2020. This decline in the average mortgage rate was not enough to offset all of the higher mortgage balances for FTBs, resulting in the average monthly payment for FTBs increasing by 7.7 percent (from $1,594 per month in 2020 to $1,718 in 2021—an increase of slightly under $1,500 per year). These monthly payments include property taxes and/or homeowners insurance if they are escrowed. However, data from CoreLogic indicate that the average down payment percentage for FTBs rose from 8.5 percent in 2020 to 9.2 percent in 2021. If the decline in the FTB share of home purchases was due to growing affordability challenges, we might have expected the average down payment percentage to have been lower in 2021 than in 2020.

A possible alternative explanation is that the decline in FTBs’ share of home purchases may reflect FTBs being crowded out of the market as the purchase activity by all-cash buyers increased. If this took place, we cannot directly identify these households in our data. We do find that the average age of an FTB increased slightly, rising from 35.7 years in 2020 to 36.4 years in 2021. This might suggest that younger households found it relatively more difficult to compete in the tight housing market of 2021. However, the rise in the average age is well within the year-to-year variation we see in our data over the past decade. The growth in FTB purchase mortgages was also concentrated in conventional mortgages guaranteed by Fannie Mae and Freddie Mac, while the volume of FTB purchase mortgages guaranteed by the FHA/VA remained constant between 2020 and 2021. This could also indicate that the challenges in transitioning to homeownership in 2021 were more acute for households that need to make smaller down payments and therefore use FHA mortgages to finance their home purchase.

The housing market was on fire in 2021, with house prices rising 19 percent nationally. Despite this headwind, the FTB share of purchase mortgages grew slightly, continuing a trend underway since 2013. However, when we factor in all-cash purchases, we find that the FTB share of home purchases declined by 1.5 percentage points. This suggests that the influx of all-cash buyers in 2021 may have crowded out some FTBs.

Donghoon Lee is an economic research advisor in the Bank’s Research and Statistics Group.

Donghoon Lee is an economic research advisor in the Bank’s Research and Statistics Group.

Joseph Tracy is an executive vice president and senior advisor to the president at the Federal Reserve Bank of Dallas.

How to cite this post:
Donghoon Lee and Joseph Tracy, “First-Time Buyers Were Undeterred by Rapid Home Price Appreciation in 2021,” Federal Reserve Bank of New York Liberty Street Economics, May 12, 2022, https://libertystreeteconomics.newyorkfed.org/2022/05/first-time-buyers-....

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Cost versus availability of loans: which matters more for mortgagors?

Published by Anonymous (not verified) on Wed, 09/03/2022 - 8:00pm in

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mortgages

Alexandra Varadi

In early 2000s, mortgage debt increased rapidly relative to income.  A key driver of this was an expansion in credit supply that made credit cheaper and more widely available. But, it is largely unknown if it is the cost of borrowing or the availability of loans that matters more for mortgagors. I examine this question in a recent paper. I find that increasing loan availability, notably at high loan to value (LTV) or high loan to income (LTI) ratios, increases household borrowing and improves credit access. The cost of borrowing matters too. It is a strong determining factor for mortgagors closer to borrowing limits, and for middle-aged borrowers. And, reducing borrowing costs in tandem with higher loan availability strongly amplifies mortgage borrowing.

Obtaining measures of borrowing cost and loan availability

I obtain indicators for the cost and availability of mortgage loans from the Bank of England Credit Conditions Survey (CCS). The survey assesses terms and conditions in credit markets on a quarterly basis. Each lender assesses how credit conditions have changed relative to the previous three months, by choosing one of the following five answers (or variations of them): ‘up a lot’, ‘up a little’, ‘same’, ‘down a little’, ‘down a lot’. Each response is then assigned a symmetric score. Positive scores indicate that, relative to the previous three months, credit availability is higher or borrowing costs are cheaper.

I use CCS information on mortgage rates and product fees on new mortgages as indicators of borrowing costs. To capture credit availability, I use CCS information for: overall loan approvals; credit availability at high and low LTV ratios; and credit availability at the maximum LTI limit set internally by banks.

UK evidence suggests that both borrowing costs and credit availability have historically moved in tandem with credit growth. For instance, times when mortgage credit growth was historically high or increasing corresponded to periods when: i) credit availability, such as at very high LTI or LTV ratios, increased (Chart 1); or ii) mortgage interest rates declined (Chart 2).

Chart 1: Credit availability at higher LTI and LTV ratios and credit growth

Note: Credit growth is obtained using the quarterly growth rate of total sterling net secured lending to individuals.

Sources: FCA Product Sales Database and Bank of England.

Chart 2: Cost of borrowing captured by mortgage spreads

Note: the residential mortgage lending spread is a weighted average of quoted mortgage rates over risk-free rates, using 90% LTV two-year fixed rate mortgages and 75% LTV tracker, two and five-year fixed-rate mortgages. Spreads are taken relative to gilt yields of matching maturity for fixed-rate products. Spreads are taken relative to Bank Rate for the tracker product. Weights based on relative volumes of new lending.

Sources: Bank of England, Bloomberg, FCA Product Sales Data and Bank calculations.

Identifying changes in borrowing cost and in loan availability that are driven by credit supply shocks

Many factors can drive changes in borrowing costs and credit availability. On one hand, they may depend on the characteristics of mortgage applicants – ie on credit demand. For instance, a rise in average incomes may decrease overall borrowing costs at banks, to reflect an improvement in the financial position of mortgage applicants. On the other hand, credit indicators may depend on credit supply. That is where lenders themselves adjust them independently of credit demand, for instance as a result of competition, changes in banks’ risk attitudes, or regulation. It is this latter effect that needs to be identified to be able to examine the link between bank behaviour and mortgage borrowing. I do so in two steps.

First, I match the CCS with rich loan-level data to obtain information on UK approvals for mortgage borrowing.

Second, I isolate the movement in mortgage borrowing that may be driven by factors other than credit supply, such as from: the economic environment; differences in how lenders respond in the CCS; borrower characteristics, including income, employment status, age or interest repayments. However, there are two factors which affect credit demand, rather than credit supply, and which are unobservable. First, borrowers are not randomly distributed across banks. They may choose banks according to unobservable characteristics. Second, the data covers mortgage approvals rather than mortgage applications. Hence, I cannot observe changes in the characteristics of mortgage applications over time. If these are large and persistent, then lenders may adjust their cost and availability of loans independently of credit supply, for instance to reflect changes in lending risks. To minimise the potential bias from these unobserved factors, I isolate credit demand factors using data from the CCS. Specifically, the CCS asks lenders’ to form an assessment of changes in credit demand, relative to the previous three months.

Once I control for all these factors, any remaining changes in mortgage borrowing should reflect changes in credit conditions driven by credit supply only. I then examine how movements in different indicators for borrowing costs and credit availability affects two measures of mortgage debt. On one hand, I consider their impact on the intensive margin of debt. This estimates how much borrowers already eligible for credit, increase their average loan amount when credit indicators change. On the other hand, I consider their effect on the extensive margin of debt. This estimates whether households access more credit overall, by examining if banks increase the number of loans they make, if credit indicators are more favourable. 

The intensive margin of debt is sensitive to both borrowing costs and credit availability, but the extensive margin is strongly driven by credit availability

I find that both borrowing costs and credit availability can independently affect the intensive margin of debt. All else equal, the average mortgage loan is higher either if banks’ internal maximum LTI limits are increased or if mortgage rates are reduced. And making credit cheaper and more widely available at the same time will double the effect on the intensive margin compared to borrowing costs alone.

In contrast, only changes in credit availability can independently affect the extensive margin of debt (ie credit access). For instance, increasing lenders’ internal maximum LTI limits, leads to a rise in the number of bank loans extended to households. Borrowing costs become an important driver of the extensive margin only when they are cut aggressively by banks, with both product fees on new loans and mortgage rates reduced simultaneously. No indicator for borrowing costs is powerful enough on its own, to affect the extensive margin.

Only credit availability matters for young borrowers, but both costs and availability matter for older, middle-income or financially constrained households

I study if the effect of borrowing costs and credit availability on mortgage debt is dependent on borrower characteristics. Table A shows that debt responses are conditional on households’ age, financial situation, housing tenure and income.

Table A: Heterogeneity by household characteristics

Household typeSensitivity to which type of credit conditions indicators?Which channel matters
more?Young householdsCredit availability (ie at high LTI and LTV ratios)Credit availabilityFirst-time buyers
Middle-income borrowersBoth borrowing costs and
credit availabilitySimilar magnitude of effectsMiddle-aged borrowersBoth borrowing costs and credit availabilityBorrowing costs effects are
twice strongerBorrowers with very high LTV or LTI ratiosBoth borrowing costs and credit availabilitySimultaneous changes in borrowing costs and credit availability needed

Debt levels of young households respond exclusively to changes in credit availability, particularly at high LTV and LTI ratios. Young adults, below the age of 30, have lower median incomes and higher median LTV ratios compared to borrowers aged 31 and above. They are also more likely to have never owed a property, with 65% of them being first-time buyers. As such, they are more likely to be credit constrained by both their earnings and by their lower deposit levels.

When looking across all first-time buyers, middle-income households (ie with median incomes of £46,900) and middle-aged borrowers (ie aged 31 to 49) debt decisions are determined by both borrowing costs and credit availability.

However, for the average first-time buyer and middle-income household, changes in different types of credit indicators, have a homogeneous effect: ie more high-LTV credit availability or a reduction in mortgage rates, increases debt levels by the same amount. In contrast, for middle-aged borrowers, credit conditions indicators have a heterogeneous effect: ie the average loan borrowed is twice more sensitive to a reduction in mortgage spreads than to a rise in banks’ internal maximum LTI limits. This indicates that later in life, the availability of riskier credit is less important for mortgagors, for instance due to higher income prospects. As a result, credit costs matter more.  

Being near collateral or income credit limits is also a key determinant of debt sensitivity to different credit conditions indicators (ie the final row in Table A). The number of loans extended to these borrowers increases following a simultaneous loosening in mortgage rates and in credit availability at either high LTV or high LTI multiples. This suggests that borrowers close to financial constraints are restricted in accessing further credit by both credit prices and by the supply of riskier loans. As a result, being able to access credit is not the only determining factor for these borrowers. The price at which credit is available, matters too.

Conclusion

This blog shows that changes to both borrowing costs and credit availability matter for household debt dynamics. Even more so, simultaneous changes in both types of indicators amplify the effects on mortgage borrowing. But changes in credit availability has wider implications as they affect more households both at the intensive and at the extensive margin. However, the relative importance of borrowing costs and credit availability depends on borrowers’ age, housing tenure, income and proximity to borrowing constraints.

Alexandra Varadi works in the Bank’s Macro Financial Risk Division.

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