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Question #8 for 2022: Housing Credit: Will we see easier mortgage lending in 2022?
Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2022. Some of these questions concern real estate (inventory, house prices, housing credit, housing starts, new home sales), and I’ll post those in the newsletter (others like GDP and employment will be on my blog).
I'm adding some thoughts, and maybe some predictions for each question.
8) Housing Credit: Will we see easier mortgage lending in 2022? Will we see a further sharp increase in mortgage equity withdrawal (MEW)?
Mortgage Equity Withdrawal
There has been some concern about recent cash out refinance activity. In Q3, we saw the largest equity extraction since the housing bubble.
Here was my discussion in The Home ATM in Q3 2021:
For Q3 2021, the Net Equity Extraction was $147 billion, or 3.24% of Disposable Personal Income (DPI). The last two quarters have shown a sharp increase in equity extraction compared to recent years, but the level is nothing like the amount of equity extraction during the housing bubble as a percent of DPI. During the housing bubble we saw several quarters with MEW above 8% of DPI.
This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method. MEW was negative for a number of years but has picked up again following the onset of the pandemic.
It is unlikely we will see more equity extraction in 2022 than in 2021. It appears there will be far less refinance activity in 2022 than in 2021, and that means fewer homeowners extracting equity.
On refinance activity, the MBA is forecasting a significant decline in refinance activity in 2022:
For 2021, refinance originations are expected to come in at $2.32T, a decline from $2.63T in 2020, but still the third largest refinance total ever. However, as rates increase and fewer borrowers have an incentive for a rate/term refinance, we expect 2022 refinance volume to be under $900B.
This will be something to watch, however, the recent increase in MEW is not concerning - it is far less as a percent of disposable personal income than during the bubble, and most homeowners have substantial equity.
Banks Easing Standards
From the Federal Reserve: The October 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices
For loans to households, banks eased standards across most categories of residential real estate (RRE) loans, on net, and reported weaker demand for most types of RRE loans over the third quarter.
The following graph from the Federal Reserve shows that banks have eased standards for most loan types (Upper right graph) but tightened for subprime. The lower right shows there was decreased demand for RRE loans in Q3.
The standards have been eased the most for Jumbo loans, both QM (Qualified Mortgage) and non-QM. Even though lending is still reasonably solid, it is a little concerning that lenders are easing standards.
Bill Conroy at Housing Wire recently had an interesting article on non-QM loans: Move over Fannie, the non-QM loan is in the fast lane. Some brief excerpts:
The universe of non-QM single-family mortgage products is broad and difficult to define in a few words, but the definition matters because a huge slice of the borrowers in this non-QM category represent the heartbeat of the U.S. economy. Within its sweep are the self-employed as well as entrepreneurs who buy single-family investment properties — and who can’t qualify for a mortgage using traditional documentation, such as payroll income. As a result, they must rely on alternative documentation, including bank statements, assets or, in the case of rental properties, debt-service coverage ratios.
Non-QM mortgages also go to a slice of borrowers facing credit challenges — such as a recent bankruptcy or slightly out-of-bounds credit scores. The loans may include interest-only, 40-year terms or other creative financing features often designed to lower monthly payments on the front-end of the mortgage — often with an eye toward refinancing or selling the property in the short-term future.
The size of the market is relatively small (about $25 billion in 2021 but growing fast). The underwriting is generally solid, but this will be a segment of mortgage lending to watch.
Mortgage equity withdrawal will probably decline in 2022, since fewer homeowners will refinance their mortgages. However, there is some concern about banks easing lending standards, and the rapid increase in non-QM loans.
This will be something to watch in 2022, but overall lending is still solid (unlike during the housing bubble).
• Question #1 for 2022: How much will the economy grow in 2022?
• Question #2 for 2022: Will the remaining jobs lost in 2020 return in 2022, or will job growth be sluggish?
• Question #3 for 2022: What will the unemployment rate be in December 2022?
• Question #4 for 2022: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020)?
• Question #5 for 2022: Will the core inflation rate increase or decrease by December 2022?
• Question #6 for 2022: Will the Fed raise rates in 2022? If so, how many times?
• Question #7 for 2022: How about housing starts and new home sales in 2022?
• Question #8 for 2022: Housing Credit: Will we see easier mortgage lending in 2022?
• Question #9 for 2022: What will happen with house prices in 2022?
• Question #10 for 2022: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2022?