Where is mortgage money going to come from?

David Goldsmith

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The Serious Disconnect Between A Hot Residential Real Estate Market And The Coming Tsunami Of Foreclosures

Various reports show that the market for previously-owned homes climbed nearly 10% in September, the fourth straight monthly increase. It is not just sale volumes that are high, but the price of homes is showing double-digit gains. If you just look at volume and prices, the U.S. residential real estate market looks as rosy as every, spurred on by very low interest rates from the same Federal Reserve which once-upon-a-time was tasked with preventing bubbles above all else but during the last three decades has arguably been the chief cause of them. That's the sunny side of the street.

The shady side of the street is much different. Mortgage delinquency rates are at a 20-year high ⸺ worse than the 2008 high if that tells you anything (and it should), and there are predictions that at least two million mortgages will soon go into default. And that is just the tip of the iceberg, as an estimated six million folks missed their mortgage or rent payment in September. The economic news isn't too hot either, as the so-called "third wave" of coronavirus cases that is beginning to his the U.S. is already proving to be the worst yet. The U.S. unemployment rate is still a relatively-high 8% or so, and the summer decrease in unemployment is slowing.
These are the views that may be derived from governmental data and other credible new reports. You didn't need me to tell you any of that. What I am going to tell you about is what I see everyday going on in the trenches, meaning in the courts where so much of the legal activity relating to foreclosures takes place.

It is a disaster. The shutting down of our state and federal court systems beginning in March of 2020, at least as they related to most civil matters, has now created huge backlogs of matters for the courts to work through. Even if there were not any foreclosures for the courts to handle, the courts seem to be anywhere from six months to a year behind where they ought to be in disposing of matters. The courts' processing of litigation is also significantly slowed by the procedures still in place because of COVID-19 which have required less-efficient off-site working by many courtroom personnel.
Next, the various moratoriums on foreclosure have kept lenders from being able to even start their processing of defaults. When the lenders finally do get rolling with foreclosures, they are going to be at the back of the increasingly-long litigation line and a judicial foreclosure that starts today is probably not going to be processed until mid- to late-2021 if the lender is lucky.

This is why a bubble exists, which arguably is an economic discrepancy between true supply and true demand. While there may be a short-term demand that is now reflected in prices, this can be attributed to the pent-up demand for home purchases from the March-July period when much of the nation was in lockdown and nobody was either showing or visiting homes for sale, a greater demand for homes in the suburbs caused by the coronavirus lockdowns in city centers, and of course, historically low mortgage rates. So in the short-term, demand has increased slightly in some areas, mostly suburbia.
The problem is that supply in the form of foreclosed homes (and homes voluntarily sold to avoid foreclosure) is about to overwhelm demand by many magnitudes. When the tsunami of foreclosures finally hits the markets, prices are going to plummet again ⸺ just like they did in the 2008 crash ⸺ and many folks nationwide are going to find themselves once again in a negative equity situation where it makes more sense for them to simply hand the keys to the bank than it does to continue making payments. This will exacerbate an already bad situation; again, just like it did in 2008.
As if that were not bad enough, collateral (both personal and commercial) has been deteriorating generally, and this will eventually result in a credit crunch that will cause more restrictive lending prices and also drive up the costs of borrowing. That will not be good for the market for residential real estate, at all.
The point of all this being that if you were thinking about getting out of your existing home anyway for whatever reason, such as that you are not too far from retirement and wanted to downsize, then now is the time to seriously consider the issue when there remains a small window open for probably no more than a few months whereby you can cash out near the top of the market. Conversely, if you are looking to upgrade your home or the location of your residence, and have the cash to do so (and are not just relying on your existing equity), then just be patient and read up on how to buy properties at sheriff sales. Otherwise, you may be at serious risk of buying at the high of the market and may end up waiting some years to get your money back.

As a side note, when crashes do occur in residential real estate markets they usually take a few years to fully bottom out. A glance at the historical charts confirms what I believe from my own experience, which is that it often takes three to five years after the crash starts for home prices to reach their lowest lows before finally rebounding. Of course, most value is lost in the first two years after the crash, so if the crash occurs in 2021 then keep your money in the bank until at least 2023 and then start looking for bargains.
By the way, if you think that what is going to happen in residential real estate will be bad, then take solace in knowing that what is about to happen in commercial office space will be much worse. Many companies have figured out that many of their employees work just as well from home, if not more efficiently from home, and are thus substantially downsizing their lease footprints causing a crash in that market already. If you are faced with either owning a heavily-leveraged 30-story office building or a truckload of turnips, take the turnips.

David Goldsmith

All Powerful Moderator
Staff member

John Walkup

Talking Manhattan on UrbanDigs.com
We did a quick analysis looking at mortgage rates vs # of contracts signed. The data is all over the place which suggests that while rates are certainly a consideration to buyers, they are not the outsized decision driver they are made out to be. The main caveat I suppose is that we have been in an ultra-low rate environment for quite a while, so the data might not be reflective of some hidden inflection point. As (hopefully) COVID becomes less of a worry and the focus shifts to getting the interaction economy back up and running, I think it will be a while before we see significantly higher rates which means buyers will rely even more on expectations for the NYC of tomorrow.

Here's what the overall data looks like:
Manhattan Contracts vs Mortgage Rate.png
Now looking at just rates vs total contracts signed (all prices):
All Manahttan Contracts Signed vs Mortgage Rate.png
Here's units under $1M:
Manhattan Contracts Signed _$1M vs Mortgage Rate.png
And here's a look at units under $750K:
Manhattan Contracts Signed _$750K vs Mortgage Rate.png

David Goldsmith

All Powerful Moderator
Staff member
Maybe I'm misreading that first chart, but it looks like interest rates going down resulted in somewhat randomized results, but almost every time there was an uptick in rates there was a somewhat corresponding downtick in deal volume?

David Goldsmith

All Powerful Moderator
Staff member
Hot Mortgage Market Is the Fed’s House of Cards
Many Americans have weathered the pandemic by refinancing their homes and benefiting from soaring property values. But what happens next?

When the definitive story is written about U.S. financial markets during the coronavirus pandemic of 2020, expect America’s housing market to play a starring role.

In many ways, it’s hard to reconcile worsening Covid-19 outbreaks with record-high levels for the Dow Jones Industrial Average and the S&P 500 Index, or the unprecedented surge in unemployment earlier this year with the fact that American households are by some measures in their best financial shape overall in decades, regardless of wealth level. It becomes a bit easier to see what’s happening when using the mortgage market as a frame of reference.

Benchmark 30-year mortgage rates have slowly but surely dropped to record lows throughout the pandemic, touching 2.78% earlier this month, according to Freddie Mac data. This has naturally encouraged more and more homeowners to refinance their mortgages, thereby allowing them to lower their monthly payments or tap equity. With more cash in their pockets, these people have kept spending levels relatively steady while also socking money away or investing in stocks or other assets. Janet Yellen, the former Federal Reserve chair and contender to be President-elect Joe Biden’s Treasury secretary, said during the Bloomberg New Economy Forum on Monday that a “savings glut” was helping to prop up financial markets.

What she didn’t say, and what’s flown largely under the radar amid the central bank’s efforts to bolster the economy, is the Fed’s role in pushing the $6.8 trillion mortgage-backed securities market to extremes. I wrote last month that the Fed might resort to infinite quantitative easing to support the $20.4 trillion U.S. Treasury market. But if the central bank ever steps away from backstopping mortgage bonds, there’s reason to believe the consequences could be even more dire.

As it stands, the Fed has bought more than $1 trillion of mortgage bonds since March, a record pace, and now holds $2 trillion of the securities on its balance sheet. That easily eclipses the previous high during the last economic recovery. Central bankers have pledged repeatedly to keep adding bonds each month “at least at the current pace,” which is often quoted as $40 billion. But that’s actually a net figure: Total monthly purchases tend to be closer to $100 billion because borrowers’ principal repayments take out some debt already on the Fed’s balance sheet.

In recent weeks, the Fed has taken its mortgage-bond buying even further. On Oct. 29, it took the unprecedented step of purchasing conventional 30-year securities with a 1.5% coupon, the lowest now available. Though it’s been careful not to go overboard, the move is nonetheless a clear indication that the central bank doesn’t expect to raise interest rates in the years to come.

All of this serves to squeeze mortgage-bond investors in higher-rate securities. Most of them bought the debt at a premium, and the constant reduction in lending rates leaves them vulnerable to prepayment risk as homeowners refinance and pay off their existing obligations at par. But it would be arguably even more painful if investors are herded into ultra-low coupon MBS, only to see rates rise. Known as “extension risk,” fund managers left holding 1.5% or 2% MBS could be saddled with huge losses if longer-term interest rates start to increase next year as the U.S. economy rebounds and inflation starts to pick up on the back of a Covid-19 vaccine.
It should be clear by now that the Fed is in a tricky spot. On the one hand, pushing down long-term mortgage rates is one of the most direct ways the central bank can bolster household balance sheets. And yet the Fed desperately wants inflation above 2% and for the U.S. economy to bounce back. If America indeed comes roaring back next year, longer-term Treasury yields should jump higher, as would the benchmark 30-year mortgage rate. But if that happens too quickly, and homeowners can no longer free up cash, that removes a key pillar of support for the economic recovery.

JPMorgan Chase & Co. may have a temporary answer for the Fed’s dilemma. Michael Feroli, the bank’s chief U.S. economist, predicted on Monday that the Fed will announce at its December meeting that it will tilt its bond buying toward longer-dated Treasuries, potentially doubling the weighted average maturity of its $80 billion of purchases. This would presumably pin down 10-year and 30-year yields, and, by extension, mortgage rates, even with the economy on the mend. Fed Vice Chair Richard Clarida on Monday indicated that policy makers are still monitoring asset purchases, though he gave no indication they were leaning in the direction of extending maturities. Still, it’s the logical next step, in the same vein as Operation Twist.

Regardless of whether policy makers go that route, it’s hard to see a way out of the mortgage market for the Fed without causing at least a hiccup in the U.S. housing market and an implosion at worst. As my Bloomberg Opinion colleague Aaron Brown wrote last week, even though U.S. home prices are nearing all-time highs, the current market isn’t necessarily a disaster in the making because the high valuations are the result of rock-bottom interest rates. However, as he made clear: “It’s one thing to be a peak valuation, it’s another to be at peak valuation with no discernible upside.”
If there’s a modest correction in housing prices, that shouldn’t be too disruptive for the economy as a whole. Rather, it’s the second-order effects of higher mortgage rates that should concern investors. As Bloomberg News’s Christopher Maloney reported, aggregate Fannie Mae 30-year prepayment speeds in September increased to their fastest since April 2004, and Wall Street analysts expect that the current “perfect refinance environment” can last awhile longer. If that doesn’t happen, for whatever reason, it would remove a crucial variable behind sustained consumer spending and the rally across risky assets.
As the calendar turns to 2021, Fed officials will need to figure out how to engineer a soft landing for the housing market. The refinancing boom the central bank engineered has helped countless Americans get through the pandemic. But it can’t afford to see it go bust. Most likely, the Fed won’t be able to extricate itself from buying mortgage bonds for at least the next several years, and possibly longer, or else risk toppling the entire house of cards it built.

John Walkup

Talking Manhattan on UrbanDigs.com
Drilling down a bit to view # contracts signed at various rates:
All Manahttan Contracts Signed vs Mortgage Rate (1).png
A cluster in the 3.5% - 4.75% range, most likely due to the amount of time rates have been around that level. R-squared of 0.001 is nothing to bet on.

John Walkup

Talking Manhattan on UrbanDigs.com
Finally, contracts <$750K:
Manhattan Contracts Signed _$750K vs Mortgage Rate (1).png
Improvement in r-squared, but essentially mortgage rates are not pushing sales to the extent that many think they do.


Well-known member
I think the rates typically matter much more in other markets, less so in this market, at least that has been my observation over the last almost two decades.

David Goldsmith

All Powerful Moderator
Staff member
Mortgage refinancing is hot, but using your home as an ATM is not
Mortgage rates have been sitting near record lows since the start of the coronavirus pandemic, and while millions of Americans have already refinanced their home loans this year, very few of them have taken cash out in the process.

Cash-out deals made up just 27% of all mortgage refinances in the third quarter of this year, according to Black Knight, a mortgage technology and data provider. That is the lowest share in seven years.

Those who are taking money out of their homes are taking out less than they have in the past. The average amount dropped to $51,600 from $63,000 the prior quarter. The total volume of equity withdrawn in the quarter fell to $37 billion, the lowest equity withdrawal since the second quarter of 2019.

This, as home values rocket higher, and the amount of home equity borrowers have soars to record levels. Just over a quarter of all mortgage holders in the U.S. are considered "equity rich," having at least 50% equity in their homes, according to Attom Data Solutions.

"To be sure, consumers' memories of the great recession have likely been re-stoked by recent pandemic-related economic distress. As a result, they may be less willing to tap into what they very well may see as an emergency source of capital," said Andrew Walden, economist and director of market research at Black Knight.

Walden notes that the current surge in refinancing is due to the sharp drop in mortgage rates, and so most borrowers are just looking for savings, not necessarily money to spend.

Borrowers today surely remember the last housing boom in the very early 2000s, when homeowners were using their properties like ATM's. When the market crashed in 2007, and home prices plummeted, millions of borrowers were left "underwater," owing more on their mortgages than their homes were worth. That sparked an epic foreclosure crisis.

"This event has since shifted the perspective of many homeowners to now view home equity as a nest egg rather than a bank account," said Matthew Weaver, vice president at CrossCountry Mortgage in Boca Raton, Florida.

But Weaver warns that holding onto excess home equity isn't always the safest financial decision.

"On the surface it seems like a more responsible and reasonable position to take, and in some cases is, however when the pendulum swings too far to one side it comes with negatives as well," said Weaver. "Credit card debt is at an all-time high. Many with equity in their homes that can (and should) tap into that equity at a lower fixed rate are electing not to do so."

The pandemic has also sparked a jump in home remodeling, as people adapt to working and schooling from home. It is, therefore, surprising that more people aren't taking cash out to pay for that.

"This is a situation where the low, fixed-rate mortgage available through cash-out refinances is typically less expensive than financing through a home improvement vendor," added Weaver.

While some are using home equity, Washington, D.C.-area contractor Justin Sullivan, president of Impact Construction, said he isn't seeing it as much as usual.

"We're hearing that money that folks are saving from not going out to restaurants, not eating out, not going on vacations, those things are being saved and they're deciding to add that value back into their homes as an investment," he said.

David Goldsmith

All Powerful Moderator
Staff member
I think the rates typically matter much more in other markets, less so in this market, at least that has been my observation over the last almost two decades.
I think the response to rate changes is skewed. Rates going down don't get as much positive response as rates going up elicit a negative response (except that small upward rate increases can have the very short term effect of knocking indecisive people off the fence and get them to pull the trigger on something they were already contemplating).

People have gotten used to insanely low mortgage rates. Imagine trying to sell a Coop when I started and share loans were at 18% interest

David Goldsmith

All Powerful Moderator
Staff member
Non-Compliance with Mortgage Guidelines Could sink the Value of Your Condo or Co-op Unit

David Goldsmith

All Powerful Moderator
Staff member

FHA Extends Foreclosure Moratorium, Expands Forbearance Options

The Federal Housing Administration (FHA) and HUD announced, a few weeks following FHFA's similar announcement, the fourth extension of its foreclosure and eviction moratorium through February 28, for homeowners with FHA-insured single-family mortgages covered under the Coronavirus Relief and Economic Security (CARES) Act. The FHFA in early December stated its extension would run "at least" through January.
FHA's moratorium prohibits servicers from initiating or proceeding with foreclosure and foreclosure-related eviction actions for FHA-insured single-family forward and reverse mortgages, except for those secured by legally vacant and abandoned properties.
The FHA also will extend, through February 28, the deadline for single-family borrowers with FHA-insured mortgages to request an initial COVID-19 forbearance from their mortgage servicer to defer or reduce their mortgage payments for up to six months, which can be extended for an additional six months, the agency announced on Monday.
In addition, said the FHA in a press release, it also has extended multiple temporary provisions for lenders and servicers to allow them to continue doing FHA business despite social distancing considerations.
Assistant Secretary for Housing and Federal Housing Commissioner Dana Wade promised the FHA will continue to assist borrowers who are struggling financially as a result of the national health crisis.
"COVID-19 has created hardships for millions of Americans," Wade said. "American homeowners should not be forced from their homes while they are seeking help."
In its press release, the FHA outlined the following additional provisions:
  • It will extend the timeframe for providing an insurance endorsement on single-family mortgages in forbearance through March 31, 2021.
  • The temporary re-verification of employment guidance and exterior-only appraisal inspection option will now be accepted through February 28, 2021.
  • Provisions for verification of self-employment, rental income, and 203(k) Rehabilitation Mortgage escrow accounts will be allowed through February 28, 2021.
The FHA encourages borrowers who can make their mortgage payments to continue to do so, the FHA said, adding that, "Those who are struggling financially because of COVID-19 should engage with their mortgage servicer ... FHA provides post-COVID-19 forbearance loss mitigation options to assist borrowers with bringing their mortgage current. FHA does not require a lump sum payment at the end of any COVID-19 forbearance period."

David Goldsmith

All Powerful Moderator
Staff member
If you were alone on a deserted island surrounded by salt water, you've got a couple of coconuts and a chest with $1 billion dollars in cash, are you rich or are you poor?
#wealth #mmt #Fed

David Goldsmith

All Powerful Moderator
Staff member

Fannie Mae increases 2021 economic growth forecast​

But GSEs predict housing activity will slow
Fannie Mae‘s latest forecast projects economic growth to hit 5.3% in 2021, an increase of 0.8 percentage points from what the government-sponsored enterprise projected last month.
The forecasted growth is significantly more than the revised numbers for 2020, which Fannie Mae projects will end up as a 2.7% contraction. The company said the economy will see an especially strong uptick in the spring months, with the expansion of COVID-19 vaccination efforts and the warmer weather.
“COVID-19 remains the dominant force altering the path of the economy through the behaviors of people, businesses and policy makers,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Therefore, the best policy for economic recovery is the broad distribution of an effective vaccine, which is underway. The sooner this can be successfully accomplished the sooner growth can accelerate, and our thought is that by mid-year vaccine distribution efforts will be well-established, allowing for a strong second half.”
But even as overall economic growth accelerates, Fannie Mae said housing growth could slow over the next year. The company’s Economic and Strategic Research Group expects home sales to rise by 3.8% in 2021, with the monthly pace slowing throughout the year. Purchase mortgage originations are expected to rise to $1.8 trillion in 2021, up from the projected $1.6 trillion in 2020, while refinance originations could reach $2.2 trillion in 2021, down from a projected all-time high of $2.8 trillion in 2020.

“Our latest forecast projects that the continued waning of pent-up demand from last year’s delayed spring homebuying season, coupled with a modest rise in interest rates, will likely slow the pace of housing, measured both by the volume of mortgages refinanced and by the pace of home sales,” Duncan said. “However, in our view, a modest slowdown in the sales pace is unlikely to prevent year-end 2021 home sales from being higher than 2020.”

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With mortgage rates near historic lows, the ESR Group estimates that 67% of outstanding mortgages have at least a half-percentage point incentive to refinance.
“One impact of our projected growth acceleration is likely to be modestly rising interest rates, whether as a result of increased growth expectations – as consumer savings are augmented by stimulus leading to stronger consumer spending – or by a modest increase in inflation driven by demand growth outpacing a recovery in supply,” Duncan said. “We believe the Fed’s policy of tolerating a modest overshoot of its long-term inflation target is likely to be tested.”
Freddie Mac is also forecasting a modest rise in interest rates bringing a slowdown in originations, however its total originations prediction comes in lower than Fannie Mae. Freddie Mac forecasted the 30-year fixed-rate mortgage to be 2.9% in 2021 and 3.2% in 2022.
“Entering 2021, we anticipate a modest rise in rates that will likely affect refinance originations, which are coming off a remarkable year. We therefore forecast total originations to decline slightly to $3.3 trillion but remain strong this year,” said Freddie Mac Chief Economist Sam Khater.
Freddie Mac’s purchase origination forecast is down just slightly from Fannie Mae’s at $1.6 trillion for 2021, but it also projected $1.8 trillion in refinance originations in 2021, down considerably from its fellow GSE’s forecast.
Freddie Mac said it expects home price growth to be 5.4% in 2021 and decrease to 3% in 2022. It said home sales will reach 6.5 million in 2021 and decrease to 6.2 million in 2022.
But despite these projected slowdowns, other economists are still forecasting a strong year ahead for the housing market. Some even say the housing market presents a bright spot for unemployment numbers, which are currently inflated due to the effects of the pandemic.

David Goldsmith

All Powerful Moderator
Staff member
Don't worry about forbearance. Everything is just fine.
"Covid-19’s Financial Toll Mounts as Homeowners Keep Postponing Mortgage Payments

Some 2.7 million homeowners are still pausing their monthly mortgage bills, and more might need help in the coming months"​


David Goldsmith

All Powerful Moderator
Staff member
Forbearance rate stubborn among home-mortgage borrowers

Improvement stopped in November as aid dwindled, virus surged​

Home-mortgage borrowers’ pandemic recovery has hit a wall.
The forbearance rate among mortgage borrowers had been improving since peaking in June at 8.55 percent. But after declining to 5.5 percent — or about 2.7 million homeowners — progress ceased in November, the Wall Street Journal reported, citing the data from Mortgage Bankers Association.
At the same time, the number of job openings has declined, and unemployment claims remain high.

“With the waning recovery, and more applications for unemployment claims, we’re likely going to see increased demand for forbearance,” said Ralph McLaughlin, chief economist at Haus, a home-finance startup. “One of the safeguards people have, if they own a home, is to apply for forbearance.”

The federal Cares Act passed last March allowed borrowers to postpone payments on federally backed mortgages for up to 12 months. But Covid infections began surging in the fall and the initial robust stimulus from Congress gave way to deadlock at the election approached.
Shunda Lee, a Texas homeowner, was going to restart payment on her home this month after a three-month forbearance from her lender expired, the Journal reported. Instead, she received a three-month extension because a short-term prospect of her job as a lawyer remains uncertain as the courthouses where she works have often been closed.

If she runs out of her forbearance allowance and is still not working full-time, she’ll ask her parents for financial help, said the 47-year-old.
“If worse comes to worst, that’s what I’ll do,” she said. “Nobody wants me to lose my house.”

John Walkup

Talking Manhattan on UrbanDigs.com
In 2023, as everyone is looking for a scapegoat for the economic collapse, a few brave financial journalists based out of Tik-Tok will realize it was all due to massively leveraged forbearance insurance swaps that created a debt black hole of dead loans and zombie portfolios. On the flip side, the Michael Lewis book will be a great 12-part series on Hulu.