Where Does the Mortgage Market Go from Here?
In the first quarter of 2010, it appeared that the mortgage market was running out of steam. An increase in mortgage originations in the second quarter, however, demonstrates that there still is demand for mortgages. According to Inside Mortgage Finance, VA-mortgage originations increased 6.3 percent from the first to the second quarter, originations from the top 25 lenders were up 7.6 percent over the same period, and total originations were up 6.3 percent. In addition, new private mortgage insurance was up 26.6 percent over last quarter. Private mortgage insurance is extra insurance lenders require when the amount of a loan exceeds 80 percent of the home’s value. The increased availability of this type of insurance could make home ownership more accessible to homeowners who don’t have enough for a 20 percent down payment.
According to a recent survey published in Inside Mortgage Finance, the improved second-quarter performance was driven by consumers taking advantage of the favorable interest rate environment and the extension of the homebuyer tax credit. Since October 2008, interest rates on 30-year fixed mortgages have fallen 155 basis points, from 6.39 percent to 4.84 percent. In addition to the favorable rates, many homebuyers decided to take advantage of the homebuyer tax credit, which gave first-time homebuyers a tax deduction of $8,000 and existing homeowners buying a new home a deduction of $6,500. The credit, which was set to expire in November 2009, was extended until April 2010.
While the second-quarter originations provide a glimmer of hope that the housing market is improving, significant challenges still lay ahead. This is evident when examining the number of delinquent mortgages, new foreclosures, and the inventory of foreclosures. Between March 2003 and June 2010, the number of delinquent loans increased from 1.6 million to nearly 4.4 million. Rising even more dramatically is the inventory of foreclosed homes, which increased from 482 thousand to slightly over 2.0 million. As of June 2010, 6.9 million loans are classified as in trouble.
The difficulties involved in attempting to rectify the imbalances in the housing market can be demonstrated by examining the July Home Affordability Modification Program (“HAMP”) Servicer Performance Report. According to the report, even though nearly 3.1 million delinquent loans were eligible for modification and 1.3 million modification trials have been started since May 2009, the number of permanent modifications started since September of 2009 has been a mere 434 thousand. Given that there are currently 4.4 million delinquent borrowers and only 434 thousand permanent modifications in the works, it is likely that the real estate market will remain fragile for some time.