Category Archives: Mortgage

Mortgage Applications Drop Despite Lower Mortgage Rates

Ah, the problems of trying to model residential mortgage purchase and refinancing applications. When mortgage rates fall, models predict a rise in both purchase and refinancing applications. This has left mortgage modelers dazed and confused.

But the recent Mortgage Bankers Association report, revealed that mortgage applications DROPPED 4.78% WoW despite mortgage rates dropping as well.

https://confoundedinterestnet.files.wordpress.com/2019/02/mbastats021519.png?w=624&h=449

Mortgage rates have been dropping since November, yet mortgage purchase applications dropped in for the latest week. Very likely this was the displacement of purchase applications was simply the “start of the year” effect after a sleepy holiday season.

https://confoundedinterestnet.files.wordpress.com/2019/02/mbappot.png?w=624&h=449

Ditto for mortgage refinancing applications. Despite mortgage rates declining. there was “start of the year” surge. But continued rate decreases have resulted in generally declining purchase applications after the surge.

https://confoundedinterestnet.files.wordpress.com/2019/02/mbarefiugh.png?w=624&h=449

On a long term view, purchase applications have remained sedate following the financial crisis and new regulations.

https://confoundedinterestnet.files.wordpress.com/2019/02/lymbap.png?w=622&h=448

Mortgage refinancing applications remain in Death Valley.

https://confoundedinterestnet.files.wordpress.com/2019/02/mbarefiltdd.png?w=622&h=448

Perhaps there is a communications breakdown?

Source: Confounded Interest

Advertisements

More Alarm Bells As Banks Report Tightening Lending Standards While Loan Demand Slides

The latest alarm signal that the US economy is on collision course with a recession came after today’s release of the latest Senior Loan Officer Opinion Survey (SLOOS) by the Federal Reserve, which was conducted for bank lending activity during the fourth quarter of last year, and which reported a double whammy of tightening lending standards and terms for commercial and industrial loans on one hand, and weaker demand for those loans on the other. Even more concerning is that banks also reported weaker demand for both commercial and residential real estate loans, echoing the softer housing data in recent months.

This tightening in C&I lending standards coupled with sharp declines loan demand, especially for mortgage and auto loans, is shown below.

https://www.zerohedge.com/s3/files/inline-images/2019-02-04%20%284%29.jpg?itok=LlvltzyK

Here are the details via Goldman:

  • 20% of banks surveyed reportedly widened spreads of loan rates over the cost of funds for large- and medium-sized firms, while 16% narrowed spreads. 14% of banks surveyed reported higher premiums charged on riskier loans, while 4% reported lower premiums. Other terms, such as loan covenants and collateralization requirements, remained largely unchanged. Demand for loans reportedly weakened on balance.
  • Relative to the last survey, standards on commercial real estate (CRE) loans tightened on net over the fourth quarter of the year. On net, 17% of banks reported tightening credit standards on loans secured by multifamily residential properties, while 13% of banks on net reported tightening standards for construction and land development loans. As above, banks reported that demand for CRE loans across a broad range of categories moderately weakened on net.
  • Banks reported that lending standards for residential mortgage loans remained largely unchanged on net in 2018Q4 relative to the prior quarter. However, this benign environment was largely as a result of slumping demand for credit, as banks reported weaker demand across all surveyed residential loan categories, including home equity lines of credit.
  • While banks reported that lending standards on consumer installment loans and autos remained largely unchanged, banks reported that lending standards for credit cards had tightened slightly. Here too demand – for all categories of consumer loans – was moderately weaker, while respondent willingness to make consumer installment loans tumbled to the lowest value since the financial crisis.

https://www.zerohedge.com/s3/files/inline-images/installment%20loans.jpg?itok=xsclC3ru

Finally, and most concerning of all, is that in their response to special questions on their 2019 outlook, assuming that economic activity continues to be in line with consensus forecasts, banks reported they plan to tighten lending standards somewhat for C&I loans, commercial real estate loans, and residential mortgage loans, in other words the most important credit would become even more difficult to attain. As a result, or perhaps due to the slowdown in the economy, banks also expect demand for C&I, CRE, and residential mortgage loans to weaken somewhat in 2019.

Banks also reported expecting delinquencies and charge-offs to increase somewhat on C&I, CRE, and residential mortgage loans; as Bloomberg’s Andrew Cinko muses “if America was heading toward an economic contraction that would be a typical expectation. But this doesn’t seem to be the case for the foreseeable future. So what gives?”

Perhaps “what gives” is that the economy is not nearly as strong as consensus would make it appear, and behind closed door, loan officers are already batting down the hatches and preparing for a recession. 

* * *

Here would be a good time to remind readers that according to a Reuters investigation conducted in mid-December, when looking behind headline numbers showing healthy loan books, “problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards” according to federal data reviewed by the wire service and interviews with bank execs.

Worse, banks are also starting to aggressively cut relationships with customers who seem too risky, which is to be expected: after all financial conditions in the real economy, if not the markets which just enjoyed the best January since 1987, are getting ever tighter as short-term rates remain sticky high and the result will be a waterfall of defaults sooner or later. Here are the all too clear signs which Reuters found that banks are starting to prepare for the next recession by slashing and/or limiting risky loan exposure:

  • First, nearly half of the applications from customers with low credit scores were rejected in the four months ending in October, compared with 43 percent in the year-ago period, according to a survey released by the Federal Reserve Bank of New York.
  • Second, banks shuttered 7 percent of existing accounts, particularly among subprime borrowers, the highest rate since the Fed started conducting surveys in 2013.
  • Third, home-equity lines of credit declined 8 percent across the industry, with growth slowing in areas such as credit cards and commercial-and-industrial loans, the survey showed.

Then there are the bank-specific signs, starting with Capital One – one of the biggest U.S. card lenders – which is restricting how much it lends to each customer even as it aggressively recruits new ones, CEO Richard Fairbank said last December.

We have been more cautious in the extension of credit, initial credit lines, the broad-based credit line increase programs,” he said. “At this point in the cycle, we’re going to hold back on that option a bit.”

Regional banks have become more cautious lately as well, as they avoid financing riskier projects like early-stage construction loans and properties without pre-lease agreements (here traders vividly recall the OZK commercial real estate repricing fiasco that sent the stock crashing). New Jersey’s OceanFirst Bank also pulled back on refinancing transactions that let customers cash out on their debt, and has started reducing exposure to industrial loans, CEO Chris Maher told Reuters.

“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”

What happens next?

While a recession is looking increasingly likely, especially as it becomes a self-fulfilling prophecy with banks slashing loans resulting in even slower velocity of money, while demand for credit shrinks in response to tighter loan standards and hitting economic growth, the only question whether a recession is a 2019 or 2020 event, bankers and analysts remain optimistic that the next recession will look much more like the 2001 tech bubble bursting than the 2007-09 global financial crisis.

We wonder why they are so confident, and statements such as this one from Flagship Bank CFO Schornack will hardly instill confidence:

“I lived through the pain of the last recession. We are much more prudent today in how we underwrite deals.”

We disagree, and as evidence we present Exhibit A: the shock write down that Bank OZK took on its commercial real estate, which nobody in the market had expected. As for banks being more “solid”, let’s remove the $1.5 trillion buffer in excess reserves that provides an ocean of artificial liquidity, and see just how stable banks are then. After all, it is this $1.5 trillion in excess reserves that prompt Powell to capitulate and tell the markets he is willing to slowdown or even pause the Fed’s balance sheet shrinkage.

Source: ZeroHedge

HUD Is Preparing To Address Rising FHA Loan Portfolio Risk With Tighter Credit

https://www.scotsmanguide.com/uploadedImages/ScotsManGuide/News/News/2018/11/FHAloan.1.jpg

(Source: by Victor Whitman | Scotsman Guide) Changes are likely to come soon that will make it harder for prospective borrowers to obtain Federal Housing Administration (FHA) loans. It’s all part of an effort to dial back loosening credit standards that have seen FHA borrower debt loads and cash-out refinancing activity rise to record levels, top officials with the U.S. Department of Housing and Urban Development (HUD) told reporters on Thursday.

“We will be making some additional changes soon,” said FHA Commissioner Brian Montgomery during a morning conference call. HUD released its fiscal 2018 annual report to Congress on the health of the FHA insurance fund.

“I couldn’t give you an exact date, but again we want to find that critical balance between providing people with the opportunity for sustainable home ownership, but again we have to maintain the right balance and protect taxpayers against risk.”  

Montgomery didn’t reveal any specific plans on where the tightening may occur, but indicated cash-out refinancing activity was in the cross-hairs of the agency.

In a year where refinances dropped dramatically, FHA’s cash-out counts rose 6percent, to 150,883, in fiscal 2018.

“Cash-out refinances, both as a percentage of our over all business and our refinance endorsement volume, are growing astronomically,”Montgomery said. Cash-out refinances comprised nearly 63 percent of all refinance transactions in fiscal 2018, up from nearly 39 percent last year, he said.

“The increase in cash-outs presents a potential future risk for us, but also challenges the core tenants of FHA’s taxpayer-backed mission.”

Montgomery said rising debt-to-income (DTI) ratios are another major concern.

“Almost a quarter of our forward-purchase business was comprised of mortgages in which a borrower had a DTI ratio above 50 percent,”he said. “That is the highest percentage since 2000. When you couple that with a trend of decreasing average credit scores — 670 this year versus 676last year and the lowest average since 2008 — most underwriters and housing-finance experts will say that managing this type of risk without corresponding scrutiny becomes problematic.”

Montgomery also said HUD has concerns about the jurisdictional right and the extent to which government entities, such as state housing-finance agencies, provide down payment assistance to FHA borrowers.  

Montgomery also indicated that HUD will not be cutting FHA insurance rates in the near future.

“While the [insurance] fund is sound at this point in time,I think we are still far away from being in a position to consider any reduction in our mortgage-insurance premium,” he said.

HUD’s insurance fund ended the 2018 fiscal year in September in better shape than the end of fiscal 2017. The net worth of the fund increased to $34.9 billion, up $8.12 billion at the end of fiscal 2017. The fund’s capital ratio, a closely watched metric that compares the net worth of the fund to the dollar balance of all active insured loans, stood at a 2.76 percent, up from 2.18 percent at the end of fiscal 2017. This was the fourth-consecutive year that the capital ratio has been above Congress’s mandated 2 percent threshold, a level it considers sufficient to sustain losses without government intervention.

The overall fund, however, was once again dragged down by FHA’s reserve-mortgage program, known as the Home Equity Conversion Mortgage (HECM). Reverse mortgages are loans that allow seniors to tap their home equity and remain in their homes for life. They represent a small portion of all FHA-insured loans, but have had an out sized impact on the risk to the fund.

The FHA portfolio of HECM-insured mortgages was estimated to have a negative value of $16.3 billion. The reverse portfolio also had a negative capital ratio of 18.83 percent.

By contrast, FHA’s regular forward-loan portfolio — loans commonly taken out by first-time home buyers  — had an estimated positive value of $46.8 billion and a healthy positive capital ratio of 3.93 percent.  

Montgomery and HUD Secretary Ben Carson, who also joined the morning call with reporters, said that elderly borrowers in the reverse program are being subsidized to an unsustainable degree by the typically lower-income,often minority, first-time home buyers in the FHA’s forward-loan program.

“We are committed to maintaining a viable HECM program, so seniors can continue to age in place, but we can’t continue to see future HECM books being subsidized by our forward-mortgage programs,” Montgomery said. “It is not beneficial to anyone, including taxpayers.”

HUD has taken steps to tighten the program already,including most recently requiring a second appraisal on homes where the value could have been inflated. Montgomery said FHA is working on a plan to conduct a census of all families who live in homes with a HECM mortgage.

Mortgage Bankers Association President Robert Broeksmit said HUD’s scrutiny of FHA’s credit standards was “prudent.” 

“We are glad to see that FHA is closely monitoring the increasing risk in the forward portfolio, indicated by rising debt-to-income ratios, declining credit scores, and the increasing use of down payment-assistance programs,” Broeksmit said. “While current FHA delinquencies are quite low, it is prudent to keep an eye on these trends to ensure the program does not face undue challenges if, and when, the economy and job market cool.”

Broeksmit also noted that MBA has previously drawn attention to the HECM portfolio’s drain on the fund, and supported recent tightening moves.

“Policy makers should continue considering ways to insulate the forward program from the volatility in the reverse program,” he said.  

That HUD might crack down on FHA-lending standards is worrisome for non-banks, however. Non-banks are now originating the bulk of FHA loans today. Reacting to the report,  non-bank trade group the Community Home Lenders Association (CHLA) said HUD should loosen restrictions on the program by eliminating an Obama-era requirement that borrowers hold FHA insurance for the life of the loan.

“CHLA also renews its call for a cut in annual premiums, a move justified by FHA’s strong financial performance,” CHLA Executive Director Scott Olson said.

US Household Debt Hits Record $13.5 Trillion As Delinquencies Hit 6 Year High

Total household debt hit a new record high, rising by $219 billion (1.6%) to $13.512 trillion in Q3 of 2018, according to the NY Fed’s latest household debt report, the biggest jump since 2016. It was also the 17th consecutive quarter with an increase in household debt, and the total is now $837 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.

Mortgage balances—the largest component of household debt—rose by $141 billion during the third quarter, to $9.14 trillion. Credit card debt rose by $15 billion to $844 billion; auto loan debt increased by $27 billion in the quarter to $1.265 trillion and student loan debt hit a record high of $1.442 trillion, an increase of $37 billion in Q3.

https://www.zerohedge.com/sites/default/files/inline-images/total%20household%20debt%20q3%202018.jpg?itok=opBhuGsn

Balances on home equity lines of credit (HELOC) continued their downward trend, declining by $4 billion, to $432 billion. The median credit score of newly originating mortgage borrowers was roughly unchanged, at 760.

https://www.zerohedge.com/sites/default/files/inline-images/household%20debt%20q3%202018.jpg?itok=cL23-bYh

Mortgage originations edged up to $445 billion in the second quarter, from $437 billion in the second quarter. Meanwhile, mortgage delinquencies were unchanged improve, with 1.1% of mortgage balances 90 or more days delinquent in the third quarter, same as the second quarter.

Most newly originated mortgages continued went to borrowers with the highest credit scores, with 58% of new mortgages borrowed by consumers with a 760 credit score or higher.

https://www.zerohedge.com/sites/default/files/inline-images/originations%20q3%202018.jpg?itok=qy4GKtMH

The median credit score of newly originating borrowers was mostly unchanged; the median credit score among newly originating mortgage borrowers was 758, suggesting that with half of all mortgages going to individuals with high credit scores, mortgages remain tight by historical standards. For auto loan originators, the distribution was flat, and individuals with subprime scores received a substantial share of newly originated auto loans.

In what will come as a surprise to nobody, outstanding student loans rose $37BN to a new all time high of $1.44 trillion as of Sept 30. It should also come as no surprise – or maybe it will to the Fed – that student loan delinquencies remain stubbornly above 10%, a level they hit 6 years ago and have failed to move in either direction since…

https://www.zerohedge.com/sites/default/files/inline-images/delinquent%20balances%20q3%202018.jpg?itok=EOHP5Bnm

… while flows of student debt into serious delinquency – of 90 or more days – spiked in Q3, rising to 9.1% in the third quarter from 8.6% in the previous quarter, according to data from the Federal Reserve Bank of New York.

https://www.zerohedge.com/sites/default/files/inline-images/transitions%20into%20delinq.jpg?itok=rV_NSyqF

The third quarter marked an unexpected reversal after a period of improvement for student debt, which totaled $1.4 trillion. Such delinquency flows have been rising on auto debt since 2012 and on credit card debt since last year, which has raised a red flag for economists.

Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $9 billion in the quarter, to $1.24 trillion. Meanwhile, credit card balances rose by $14 billion, or 1.7%, after a seasonal decline in the first quarter, to $829 billion.

Despite rising interest rates, credit card delinquency rates eased slightly, with 7.9% of balances 90 or more days delinquent as of June 30, versus 8.0% at March 31. The share of consumers with an account in collections fell 23.4% between the third quarter of 2017 and the second quarter of 2018, from 12.3% to 9.4%, due to changes in reporting requirements of collections agencies.

Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $27 billion in the quarter, to $1.265 trillion. Meanwhile, credit card balances rose by $15 billion to $844 billion. In line with rising interest rates, credit card delinquency rates rose modestly, with 4.9% of balances 90 or more days delinquent as of Sept 30, versus 4.8% in Q2.

Overall, as of September 30, 4.7% of outstanding debt was in some stage of delinquency, an uptick from 4.5% in the second quarter and the largest in 7 years. Of the $638 billion of debt that is delinquent, $415 billion is seriously delinquent (at least 90 days late or “severely derogatory”). This increase was primarily due to the abovementioned increase in the flow into delinquency for student loan balances during the third quarter of 2018. The flow into 90+ day delinquency for credit card balances has been rising for the last year and remained elevated since then compared to its recent history, while the flow into 90+ day delinquency for auto loan balances has been slowly trending upward since 2012. About 215,000 consumers had a bankruptcy notation added to their credit reports in 2018Q3, slightly higher than in the same quarter of last year. New bankruptcy notations have been at historically low levels since 2016.

This quarter, for the first time, the Fed also broke down consumer debt by age group, and found that debt balances remain more concentrated among older borrowers. The shift over the past decade is due to at least three major forces. First, demographics have changed with large cohorts of baby boomers entering into retirement. Second, demand for credit has shifted, along with changing preferences and borrowing needs following the Great Recession. Finally, the supply of credit has changed: mortgage lending has been tight, while auto loans and credit cards have been more widely available.

https://www.zerohedge.com/sites/default/files/inline-images/borrowing%20age%20group.jpg?itok=5PLsESYJ

In addition to an overall increase in the share of debt held by older borrowers, there has been a noticeable shift in the composition of debt held by different age groups. Student and auto loan debt represent the majority of debt for borrowers under thirty, while housing-related debt makes up the vast majority of debt owned by borrowers over sixty.

https://www.zerohedge.com/sites/default/files/inline-images/loans%20by%20age%20group%20q3%202018.jpg?itok=ygoRLkGs

Confirming what many know, namely that Millennial borrowers are screwed, the Ny Fed writes that older borrowers have longer credit histories with more borrowing experience, as well as higher and typically steadier incomes; “thus, they often have higher credit scores and are safer bets for lenders.” Tighter mortgage underwriting during the years following the Great Recession has limited mortgage borrowing by younger and less creditworthy borrowers; meanwhile, student loan balances – and as most know “student” loans are usually used for anything but tuition – and participation rose dramatically and credit standards loosened for auto loans and credit cards. Consequently, there has been a relative shift toward non-housing balances among younger borrowers, while housing balances moved to the older and more creditworthy borrowers with lower delinquency rates and better performance overall.

And since this is a circular Catch 22, absent an overhaul of how credit is apportioned by age group, Millennials and other young borrowers will keep getting squeezed out of the credit market resulting in a decline in loan demand – and supply – which is slow at first and then very fast.

Source: ZeroHedge

The “Nightmare Scenario” For Beijing: 50 Million Chinese Apartments Are Empty

Back in 2017, we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US, with the remainder invested financial assets.

https://www.zerohedge.com/sites/default/files/inline-images/China%20vs%20US%20Real%20Estate.jpg?itok=5IqhgbP6

Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, “smooth landing” process. For now, Beijing has been successful in maintaining price stability at least according to official data, allowing the air out of the “Tier 1” home price bubble which peaked in early 2016, while preserving modest home price appreciation in secondary markets.

https://www.zerohedge.com/sites/default/files/inline-images/china%20housing%20prices%20nob%202018.jpg.png?itok=-mOQzvpR

How long China will be able to avoid a sharp price decline remains to be seen, but in the meantime another problem faces China’s housing market: in addition to being the primary source of household net worth – and therefore stable and growing consumption – it has also been a key driver behind China’s economic growth, with infrastructure spending and capital investment long among the biggest components of the country’s goal seeked GDP. One result has been China’s infamous ghost cities, built only for the sake of Keynesian spending to hit a predetermined GDP number that would make Beijing happy.

Meanwhile, in the process of reflating the latest housing bubble, another dire byproduct of this artificial housing “market” has emerged: tens of millions of apartments and houses standing empty across the country.

According to Bloomberg, soon-to-be-published research will show that roughly 22% of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That amounts to more than 50 million empty homes.

https://www.zerohedge.com/sites/default/files/inline-images/china%20empty%20housing.jpg?itok=Du2u0gko

The reason for the massive empty inventory glut: to keep supply low and prices artificially elevated by taking out as much inventory off the market as possible. This, however, works both ways, and while it helps boost prices on the way up as the economy grow and speculators flood the housing market with easy money, the moment the trend flips the spike in supply as empty units are offloaded will lead to a panic liquidation of homes, resulting in what may be the biggest housing market crash ever observed, and putting the US home bubble of 2006 to shame.

Indeed, as Bloomberg notes, the “nightmare scenario” for Chinese authorities is that owners of unoccupied dwellings rush to sell when cracks start appearing in the property market, causing a self-reinforcing downward price spiral.

https://www.zerohedge.com/sites/default/files/inline-images/2018.01.16%20-%20China%202_0.JPG?itok=NKo1S80f

Worse, the latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation – which alongside shadow banking and the persistent threat of sudden bank runs (like the one discussed last week) is considered by Beijing a key threat to financial and social stability – have failed.

“There’s no other single country with such a high vacancy rate,” said Gan, of Chengdu’s Southwestern University of Finance and Economics. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood.”

How did the Chinese researcher obtain this troubling number? To find the percentage of vacant housing, thousands of researchers spread out across 363 Chinese counties last year as part of the China Household Finance Survey, which Gan runs at the university.

Gan said that the vacancy rate, which excludes homes yet to be sold by developers, was little changed from a 2013 reading of 22.4%. And while that study showed 49 million vacant homes, Gan puts the number now at “definitely more than 50 million units.

Meanwhile, Beijing – which is fully aware of these stats, and is also aware that even a modest price decline could be magnified instantly as millions of “for sale” units hit the market at the same time – is worried. That’s why Chinese authorities have imposed buying restrictions and limited credit availability, only to see money flooding into other areas. Rampant price gains also mean millions of people are shut out from the market, exacerbating inequality.

In fact, China’s president Xi famously said in October last year that “houses are built to be inhabited, not for speculation”, and yet a quarter of China’s housing is just that: empty, and only serves to amplify speculation.

While holiday homes and the empty dwellings of migrants seeking work elsewhere account for some of the deserted properties, Gan found that investment purchases have been the biggest factor keeping the vacancy rate high. That’s despite curbs across the country meant to discourage buying of multiple dwellings.

https://www.zerohedge.com/sites/default/files/inline-images/china%20first%20third%20homes.jpg?itok=XrW3_Ces

There is another economic cost to this speculative frenzy: the drop in supply puts upward pressure on prices and crowds young buyers out of the market, according to Kaiji Chen, who co-authored a Fed paper called “The Great Housing Boom of China.” 

And, as Americans so fondly recall, the result of chasing unaffordable homes for the purpose of price speculation has resulted in yet another unprecedented debt bubble: according to Caixin, outstanding personal home mortgages in China have exploded seven fold from 3 trillion yuan ($430 billion) in 2008 to 22.9 trillion yuan in 2017, according to PBOC data

https://www.zerohedge.com/sites/default/files/inline-images/china%20mortgage%20loans%202.jpg?itok=gIHvrds0

By the end of September, the value of outstanding home mortgages had surged another 18% Y/Y to a record 24.9 trillion yuan, resulting in a trend that as Caixin notes, has turned many people into what are called “mortgage slaves.”

It has also resulted in yet another housing bubble: home mortgage debt now makes up more than half of total household debt in China. As of the third quarter, it accounted for 53% of the 46.2 trillion yuan in outstanding household debt.

For now, few are losing sleep over what will be the next massive housing bubble to burst. An example of a vacant home is a villa on the outskirts of Shanghai that 27-year-old Natalie Feng’s parents bought for her. The two-story residence was meant to be a weekend escape for the family of three. In reality, it’s empty most of the time, and Feng says it’s too much trouble to rent it out.

“For every weekend we spend there, we need to drive for an hour first, and clean up for half a day,” Feng said. She joked that she sometimes wishes her parents hadn’t bought it for her in the first place. That’s because any apartment she buys now would count as a second home, which means she’d have to make a bigger down payment.

* * *

What is troubling is that despite relatively stable home prices, the foundations behind the housing market are cracking. As the WSJ recently reported, in early December, a group of homeowners stormed the sales office of their Shanghai complex, “Central Washington”, whose developer, Shanghai Zhaoping Real Estate Development, was advertising new apartments at a fraction of the prices of the ones sold earlier in the year. One apartment owner said the new prices suggested the value of the apartment she bought from the developer in March had dropped by about 17.5%.

“There are people who bought multiple homes who are now trying to sell one to pay off the mortgage on another,” said Ran Yunjie, a property agent. One of his clients bought an apartment last year for about $230,000. To find a buyer now, the client would have to drop the price by 60%, according to Ran.

Meanwhile, in a truly concerning demonstration of what will happen when the bubble finally bursts, last month we reported that angry homeowners who paid full price for units at the Xinzhou Mansion residential project in Shangrao attacked the Country Garden sales office in eastern Jiangxi province last week, after finding out it had offered discounts to new buyers of up to 30%.

“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities. “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao added, echoing Ben Bernanke circa 2005.

But the biggest surprise once the music finally stops may be that – as a fascinating WSJ report revealed one year ago –  China’s housing downturn is likely far, far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market.

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/10/21/building%20out%20china%20builders%20wsj_0.jpg

In other words, while China already has a record 50 million empty apartments, the real number – when excluding the government’s own stealthy purchases of excess inventory – is likely significantly higher. It is this, and not China’s stock market, that has long been the biggest time bomb for Beijing, and if Trump and Peter Navarro truly want to crush China in their ongoing trade war, they should focus on destabilizing the housing market: the Chinese stock market was, and remains just a distraction.

To summarize:

  • China has more than 50 million vacant apartments
  • Mortgage loans have grown 8-fold in the past decade
  • Prices are kept steady thanks to constant government purchases of surplus inventory
  • Home prices are already cracking, with some homebuilders forced to cut prices by 30%.
  • Homebuyers revolt, forming angry militias and storm homesellers’ offices when prices dip

For now, China has been able to maintain the illusion of stability to preserve social order. However, should the housing slowdown accelerate significantly and tens of millions in empty units suddenly hit the market, then the “working class insurrection” that China has been preparing for since 2014…

https://www.zerohedge.com/sites/default/files/inline-images/China%20insurrection%201%20%281%29.jpg

… will become an overnight reality, with dire consequences for the entire world.

Source: ZeroHedge

GSE Loan Purchases Continue To Trend Down

Fannie Mae and Freddie Mac are bankrolling significantly fewer loans this year, reflecting the general slowdown in the residential U.S. mortgage market.

In the nine months through the third quarter, the government-sponsored enterprises (GSEs) purchased a combined 2.47 million home loans, down 9 percent for the same nine months in 2017, the companies reported last week in quarterly reports.

The GSEs bankroll around 45 percent of all residential mortgages, according to the Urban Institute, by purchasing loans from lenders, wrapping them with a government guarantee and securitizing most of them for sale in the secondary market.

fanncountsq3The combined balance of these loans through the third quarter was $577 billion, down 7 percent from the 2017 level for the same nine months.

freddvolq3GSE funding activity has dropped for the second consecutive year.

freddcountq3The 2018 year-to-date counts and volume balances were down 16 percent and 15 percent, respectively, compared to same nine months in 2016.

During a conference call last week, Fannie Mae Chief Financial Officer Celeste Brown alluded to tough conditions for lenders. 

“At a high level, what I see is that our customers are facing a lot of headwinds in the market,” she said. “Rates are up, volumes are down, and margins are tight, so lender profitability is challenged. New housing supply is up but not all the supply has been created where it’s needed. While we do see income growth nationally, in many markets home-price growth has outstripped income growth so affordability for home buyers remains a challenge,” Brown said. 

The numbers have waned as a result of the big drop in refinancing activity. The combined GSE refinance counts totaled 909,000, down 26 percent from the 1.23 million refinance loans acquired by the GSEs through the first nine months of 2017. The GSE reports indicate that cash-out refinancing levels have remained fairly stable, whereas rate-reduction and term refinances are falling steeply. 

Meanwhile, the home-purchase market hasn’t grown at anywhere near the pace that refinance activity has been falling.The combined GSE home-purchase loan counts through the third quarter totaled 1.56 million, up 5 percent over the 2017 level.

U.S. home sales are expected to be flat this year or even decline marginally due to rising prices; a lack of affordable, entry-level homes for sale; and rising rates.

“Our expectations for housing have become more pessimistic,” Fannie Mae Chief Economist Doug Duncan said in October. “Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time home buyers, remains atop the list of challenges facing the housing market.”

Fannie Mae’s most recent forecast calls for the origination volume for the entire market to fall 10.5 percent year over year in 2018, to $1.63 trillion. Refinance volume is predicted to decline by 30 percent over the 2017 level to $454 billion. Purchase volume in 2018 will remain essentially flat with the 2017 level at $1.18 trillion, Fannie forecasts. 

Source: by Victor Whitman | Scotsman Guide

Mortgage Applications Plummet To 18-Year Lows As Rates Hit 2010 Highs

With purchase applications tumbling alongside the collapse in refinancings, the headline mortgage application data slumped to its lowest level since September 2000 last week.

This should not be a total surprise as Wells Fargo’s latest results shows the pipeline is collapsing – a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis.

https://www.zerohedge.com/sites/default/files/inline-images/wells%20originations%20q3%202018.jpg

But in the month since those results, mortgage rates have gone higher still… (this is now the biggest 2Y rise in mortgage rates since 2000)…

https://www.zerohedge.com/sites/default/files/inline-images/2018-11-07_6-09-14.jpg?itok=LzR03TeD

Sparking further weakness in the housing market…

https://www.zerohedge.com/sites/default/files/inline-images/2018-11-05_6-07-54_0.jpg?itok=8OzM0s81

And absent Christmas weeks in 2000 and 2014, this is the weakest level of mortgage applications since September 2000…

https://www.zerohedge.com/sites/default/files/inline-images/2018-11-07_5-14-48.jpg?itok=Te5Jq7L_

What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye. 

And, as famed housing-watcher Robert Shiller recently noted, the weakening housing market is similar to the last market high, just before the subprime housing bubble burst a decade ago.

The economist, who predicted the 2007-2008 crisis, told Yahoo Finance that current data shows “a sign of weakness.”

“This is a sign of weakness that we’re starting to see. And it reminds me of 2006 … Or 2005 maybe,”

Housing pivots take more time than those in the stock market, Shiller said, adding that:

“the housing market does have a momentum component and we’re seeing a clipping of momentum at this time.”

The Nobel Laureate explained:

 If the markets go down, it could bring on another recession. The housing market has been an important element of economic activity. If people start to get pessimistic about housing and pull back and don’t want to buy, there will be a drop in construction jobs and that could be a seed for another recession.” 

When reminded that 2006 predated the greatest financial crisis in a lifetime, RT notes that Shiller acknowledged that any correction would likely be far less severe.

“The drop in home prices in the financial crisis was the most severe drop in the US market since my data begin in 1890,” the Yale economist said.

“It could be that we’re primed to repeat it because it’s in our memory and we’re thinking about it but still I wouldn’t expect something as severe as the Great Financial Crisis coming on right now. There could be a significant correction or bear market, but I’m waiting and seeing now.”

Tick, tick, Mr Powell.

Source: ZeroHedge