Trip Back to Reality Starts: Mortgages, HELOCs, Delinquencies, and Foreclosures in Q2

Abstract

As the Fed's interest-rate repression and QE pushed down mortgage rates, and as home prices rose, folks began to cash-out-refinance their mortgages to generate cash, rather than drawing on HELOCs. There is now a new dynamic in place: Much higher mortgage rates: It would be stupid to refinance a 3% mortgage with a 5% mortgage in order to draw $100,000 in cash out of the home. It's better to leave the 3% mortgage alone, and get a $100,000 HELOC that charges 5% on the outstanding balance, if any. Consumer debt balances in Q2: Mortgages is where the big systemic risks used to be due to the sheer size of the market and the high leverage. Commercial Banks in the US only hold about $2.4 trillion of residential mortgages, including HELOCs, on their balance sheets, and those are spread among 4,300 commercial banks. Under the pandemic-era forbearance programs, homeowners that fell behind on their mortgage payments, or stopped making mortgage payments altogether, and then entered into a forbearance program, were reclassified to "Current" instead of delinquent. The spike in home prices since spring 2020 allowed homeowners, when it came time to exit the forbearance program, to either sell the home and pay off the mortgage and walk away with extra cash; or work out a deal with the lender, such as a modified mortgage with a longer term, a lower rate, and lower payments.