Wells Fargo’s decision to stop accepting applications for Home Equity Lines of Credit (HELOCs) isn’t entirely surprising, given how the home lending space has operated in the last month. Average mortgage rates quoted to the most creditworthy borrowers seeking the most straightforward loan types have fallen to all-time lows. But the market for less typical loans – and for borrowers with less-than-excellent credit – remains very tight. This is because, despite historic improvements in the stock market, the level of uncertainty throughout financial markets and the economy remains extremely high. Banks are unable (and unwilling) to accurately calculate factors such as borrower creditworthiness and the movement of home prices over time. Amid that backdrop, abandoning HELOC lending was maybe a foregone conclusion. HELOCs are viewed as riskier than mortgages in uncertain times, because in the case of foreclosure, the lender that made the primary mortgage gets paid back before the lender that extended the HELOC. But Wells Fargo’s abandonment – following a similar move made by JP Morgan Chase a couple weeks ago – does pose some challenges for households looking to weather the current economic storm. Home equity has risen notably in the years since the global financial crisis, and dipping into it could theoretically offer a source of cash to households that may have lost income, helping to pay down some short-term obligations and/or keep small businesses afloat until a broader reopening.
We likely won’t know how many households paid their mortgage on the first day of May for another week or so, but a recent report shows that the number of homeowners with a mortgage receiving some relief is continuing to grow. According to Black Knight, 7.3% of all mortgages were enrolled in a forbearance program as of yesterday. The number is up 400,000 from a week ago, and represents $841 billion in unpaid principal. It’s important to note that, while it might seem like forever since the coronavirus outbreak began, only one full mortgage payment cycle (April) has passed since the outbreak hit U.S. soil en masse. How (and whether) this metric moves in the next few weeks will be a clear indication of how much relief the mortgage industry will need and, more importantly, what share of homeowners find themselves in dire straits due to this crisis.
Today’s read on manufacturing sector activity exceeded expectations, but that didn’t make the news any less sour. The relatively muted decline in the ISM Manufacturing headline index was buoyed by the highest reading on supplier delivery times since 1974. In normal times, longer delivery times suggest that demand for manufactured goods has elevated, but these days this increase is likely due to major disruptions in supply chains and/or supplier business closures. But while the manufacturing sector, and overall economy, continues to languish, some very faint signs are emerging which might offer some hope as we begin a new month. Bank of America reported today that they are seeing some modest signs of growth in consumer spending, with some minor improvements observed in spending for gasoline, clothing and at restaurants. It’s still too early to say that consumer spending has reached bottom and is ready to ramp back up, but any positive news to do with consumer activity – which powers about 2/3 of the economy – is good news at a time like this.
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