March 30, 2020

Pending home sales rose to their highest level in three years in February — but offer little immediate hope. Mortgage lenders are facing a daunting new reality. And credit card and auto loan delinquencies are creeping up.

• Pending sales offer more confirmation that the pre-crisis housing market was strong

  • Pending home sales – a measure of signed contracts, but not-yet-closed deals – unexpectedly rose 2.4% in February from January, and were up 9.4% from February 2019.
  • February’s numbers were the highest level in three years.

• Mortgage industry turmoil continues

  • Aggressive Fed action helped settle mortgage rates, but also introduced new challenges for lenders.
  • Cash-strapped mortgage servicers are still waiting for clarity on how they might be helped.

• Household balance sheets are beginning to show signs of strain

  • Credit card and auto loan delinquencies have begun steadily rising.
  • Mortgage delinquency rates reached an all-time low in January, but they are virtually certain to begin rising as well.

So what?

Pending home sales rose to their highest level in three years in February, and were up in all four major areas of the country, reinforcing the notion that the housing market was on solid footing to begin the year. But, while pending home sales are normally a decent leading indicator of actual closed sales four-to-six weeks later, these aren’t normal times. It’s likely many contracts signed in February ultimately fell through in later weeks for reasons including cold feet, job losses, unavailability of necessary services like appraisals and inspections and/or an inability to secure financing in a tough mortgage market.

Despite historic Fed intervention aimed at settling markets (and, by extension, mortgage rates), that intervention itself is introducing new challenges and uncertainty. Last week, the Mortgage Bankers Association (MBA) noted the fact that a governmental mortgage forbearance program could bring devastating hardship to mortgage servicers, who lacked the capital to withstand a loss of monthly payments. And over the weekend, the MBA illustrated some of the risks to mortgage lenders created by the Fed’s move to purchase mortgage-backed securities in order to stabilize markets. When mortgage lenders offer a locked-in rate to a borrower, they often hedge the risk of the market rate increasing by “shorting” a separate mortgage-backed security — essentially making an equal bet with a broker dealer that the mortgage market will weaken and that rates will increase. As long as rates are relatively stable, these actions can insulate lenders from risk — but, of course, rates are not particularly stable right now. 

The Fed’s strong intervention helped stabilize markets, but it also caused mortgage rates to fall in the course of a few days or weeks by as much as they otherwise might have in months. The sharply falling rates caused massive losses in lenders’ short positions, prompting margin calls – or a demand for more cash – from broker dealers. Estimates suggest that lenders are now suddenly on the hook for large amounts of cash they don’t have, putting them at grave risk, particularly when the market for unconventional loans (jumbo, government, etc.) has essentially dried up. These emerging issues haven’t gone unnoticed by officials, who have pledged to address what they can, though so far no concrete proposals have emerged. And it’s probably not a stretch to imagine other unintended consequences of the Fed’s well-intentioned actions, offering yet another example of how complex this crisis is and could continue to be.

What’s more, some signs of stress are also emerging in other classes of household debt. Over the past several years since the end of the Great Recession, the quality of mortgage debt has risen tremendously: By the end of 2019, 63.6% of all mortgage borrowers had a credit score of 760 or higher, up from just 23.6% in 2006. But that marked improvement in mortgage health has not occurred to the same extent with auto or credit card-related debt, two industries which were showing signs of weakness even before the crisis hit in full force. According to the Federal Reserve Bank of New York, the share of auto loans that were at least 90 days delinquent rose to 4.94% by the end of 2019, just shy of their highest levels on record. And credit card delinquencies, while still much better than where they were in 2010, have nevertheless been steadily rising since the middle of 2016. Sudden increases in job losses might accelerate these emerging trends, and could thwart consumer/lender confidence once the economy does start to recover.

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