Current US housing downturn not like pre-GFC

The current downturn in the US housing market might not be as severe as the 2007-2008 crash that led to the Global Financial Crisis.

According to CNBC, there are some key differences in the current market, including higher lending standards, which means it’s in better health today.

For the 53.5 million first lien home mortgages in America today, the average borrower’s FICO credit score is a record high 751 according to CNBC.

It was 699 in 2010, two years after the financial sector’s meltdown and lenders have been a lot stricter about lending, with much of that reflected in credit quality.

At the same time, home prices have soared due to pandemic-fueled demand over the past two years, giving homeowners record amounts of equity. 

Tappable equity, which is the amount of cash a borrower can take out of their home while still leaving 20 per cent equity on paper, hit a record high of $11 trillion collectively this year, according to Black Knight, a mortgage technology and data provider – a 34 per cent increase from a year ago.

While leverage, which is how much debt the homeowner has against the home’s value, has fallen dramatically.

Total mortgage debt in the United States is now less than 43 per cent of current home values, the lowest on record. 

Negative equity, which is when a borrower owes more on the loan than the home is worth, is virtually nonexistent, compared to the more than one in four borrowers who were underwater in 2011. 

Just 2.5 per cent of borrowers have less than 10 per cent equity in their homes and all of this provides a huge cushion should home prices actually fall, CNBC said.

Across the US, the amount of home loans with variable interest rates is also far lower than during the first downturn.

There are currently 2.5 million adjustable-rate mortgages (ARMs) outstanding today, or about 8 per cent of active mortgages, the lowest volume on record, according to CNBC.

In 2007, just before the housing market crash, there were 13.1 million ARMs, representing 36 per cent of all mortgages. 

Back then, the underwriting on those types of loans was less stringent, but new regulations following the housing crash changed the rules.

ARMs today are not only underwritten to their fully indexed interest rate, but more than 80 per cent of today’s ARM originations also operate under a fixed rate for the first seven to 10 years.

Today, 1.4 million ARMs are currently facing higher rate resets, so given higher rates, those borrowers will have to make higher monthly payments, which is a risk but, in 2007, about 10 million ARMs were facing higher resets CNBC said.

Mortgage delinquencies are now at a record low, with just under three per cent of mortgages past due.

Even with the sharp jump in delinquencies during the first year of the pandemic, there are fewer past-due mortgages than there were before the pandemic.

Pandemic-related mortgage forbearance programs helped millions of borrowers recover, but there are still 645,000 borrowers in those programs.

There are, however, about 300,000 borrowers who have exhausted pandemic-related forbearance programs and are still delinquent. 

In addition, while mortgage delinquencies are still historically low, they have been trending higher lately, especially for more recent loan originations CNBC noted.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.