Mortgage Rates Break 7%, 1st Time in 2 Decades

Image of a home with an arrow indicating rising mortgage rates

Mortgage Rates Break 7%, 1st Time in 2 Decades

Button to Download the Current issue of Jumbo Rate News now

U.S. banks reported that total loans and leases 30-89 days past due at June 30th were up 25% from a year earlier. And, as we reported last week, a sizable portion of that increase was attributed to credit cards and other loans to individuals. As the Federal Reserve continues its rate raising campaign, this trend will likely get worse.

Not only could these early stage past due credit cards turn into longer term delinquencies, inflationary pressures are apt to force more difficult decisions-like paying bills or feeding the family.  So this week we want to focus on how all of this might translate to home mortgages.

Although the inflation rate rose less in October (7.7% higher than a year ago as opposed to 8.2% in September and 9.1% in June), it is still a major force. And, so far anyway, it remains stubbornly resistant to the Fed’s attempts to bring it down to its 2% target. Although, these things do take time. (Sigh!) CORE inflation, which excludes the more volatile food and energy categories, is now at 6.3% after rising 0.3% in October.

When all is said and done, this may turn out to be the first indicator that the Fed’s policies are starting to work. We say this because CORE was up 0.6% in both August and September. But, for those of us who do have to eat, drive and heat our homes, that is of little comfort.

As of October 27th, Freddie Mac  reported its 30 year fixed rate mortgage was 7.08%, more than double where it was at the start of the year (3.06%). After two decades of easy credit, the costs associated with buying a home are at their highest level since April 2002. And, they are still rising. This has caused considerable deceleration in the number of home sales and originations over the course of the year, particularly with low and moderate income homebuyers.

The Federal Reserve‘s October Senior Loan Officer Opinion Survey then revealed two interesting trends. The first is that, even with demand waning, lending standards are tightening. This indicates that lenders are also expecting consumers to have some difficulty making ends meet. The other bit that we found quite interesting, was that demand for home equity lines (HELOCs) is growing.

We know HELOCs grew during the pandemic as many of us tapped into our home’s equity to make improvements while we were staying at home anyway. This may be more of the same. It’s also possible that these loans are being used as a safety net, in case borrowers do need help paying their monthly bills.

The 51 banks listed on page 7 each report` that at least 25% of their loan portfolio is invested in residential real estate (1-4 family first or second liens, or HELOCs). In some cases the banks reduced that reliance over the 12 month period ending June 30th, 2022; in other cases they increased it. In all cases,  delinquent residential loans (those 90 days or more past due or in nonaccrual status) is at least 1.5% of the total, and is on the rise.

One of the banks that reduced its reliance on home loans by tightening lending standards was the $25 billion asset 5-Star Flagstar Bank, Troy, MI. While Flagstar still has over 38% of its loan portfolio invested in residential real estate, its reliance is down from 48% a year ago. That was prudent, since its delinquency rate on those loans rose from 3.6% to over 9% during the 12 month period. It’s not as bad as it sounds, though. Many of its loans are guaranteed by the government. Even without guarantees, Flagstar’s overall delinquency rate is 2.71% and when you remove the delinquent loans that do have government guarantees, the number goes all the way down to 0.48%.

So, yes Virginia, a 5-Star bank can have high delinquencies, just so long as the government  (i.e. taxpayers) is guaranteeing the loans.

On the other hand, 4-Star Western Alliance Bank, Phoenix, AZ experienced robust year-over-year growth in its residential loan portfolio (86.6%). Delinquencies on those loans rose from 4.14% at June 30, 2021 to 5.72% at June 30, 2022. This could be a problem for another bank, especially since its reserves only cover 25% of delinquencies.

But, like Flagstar, a large portion of Western Alliance Bank’s loans carry government guarantees. Its total delinquency to asset ratio is 1.65% but removing government guaranteed loans from the equation, that ratio drops to just 0.13%.

Then there are other banks listed, like 2-Star Beauregard FSB, DeRidder, LA, that have no such guarantees. In this case, residential RE loans represent more than half of total loans. And delinquent Residential RE loans grew from 2.78% last June to 4.26% this June.

Button to Download the Current issue of Jumbo Rate News now