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Fear Not. This is Not 2008 Revisited.

Those of us who were around for the Great Recession of 2008 may be suffering a bit of PTSD at this point, thinking the economy might begin to look, feel, and hit us like the last downturn. But as CNBC’s Diana Olick tells us, the truth will set you free. Because whatever happens next can’t be compared to those times.

America’s housing market is in far better health today, thanks in part to lending regulations put into place those 14 years ago that resulted from that meltdown — rules that put today’s borrowers on far firmer footing. “For the 53.5 million first-lien home mortgages in America today, the average borrower FICO credit score is a record high 751,” says Olick. “It was 699 in 2010, two years after the financial sector’s meltdown. Lenders have been much more strict about lending, much of that reflected in credit quality.”

Unlike 2007-2008, home prices have soared so that even if they soften a bit, today’s homeowners possess record amounts of home equity. “So-called tappable equity, which is the amount of cash a borrower can take out of their home while still leaving 20% equity on paper, hit a record high of $11 trillion collectively this year, according to Black Knight, a mortgage technology and data provider. That’s a 34% increase from a year ago,” says Olick. All that time, homeowner consumer debt measured against a home’s value has fallen dramatically.

“Total mortgage debt in the United States is now less than 43% of current home values, the lowest on record,” says Olick. “Negative equity, which is when a borrower owes more on the loan than the home is worth, is virtually nonexistent. Compare that to the more than 1 in 4 borrowers who were underwater in 2011. Just 2.5% of borrowers have less than 10% equity in their homes. All of this provides a huge cushion should home prices actually fall.”

The number of adjustable-rate mortgages is no longer scary as well. “There are currently 2.5 million adjustable-rate mortgages, or ARMs, outstanding today, or about 8% of active mortgages. That is the lowest volume on record. ARMs can be fixed, usually for terms of five, seven or 10 years,” says Olick. Compare that to 2007, just before the housing market crash, when there were 13.1 million ARMs, representing 36% of all mortgages. “Back then, the underwriting on those types of loans was sketchy, to say the least, but new regulations following the housing crash changed the rules.” She adds that ARMs today are not only underwritten to their fully indexed interest rate, but more than 80% of today’s ARM originations also operate under a fixed rate for the first seven to 10 years.

For the 1.4 million ARMs currently facing higher rate resets, given higher rates, those borrowers will have to make higher monthly payments. That is unquestionably a risk. But, in 2007, about 10 million ARMs were facing higher resets. Not the same ball game. Mortgage delinquencies are now at a record low, with just under 3% of mortgages past due, according to Olick. “Even with the sharp jump in delinquencies during the first year of the pandemic, there are fewer past-due mortgages than there were before the pandemic. Pandemic-related mortgage forbearance programs helped millions of borrowers recover, but there are still 645,000 borrowers in those programs.”

The mortgage market is on a very historically strong footing, according to Andy Walden, vice president of enterprise research at Black Knight. “Even the millions of homeowners who availed themselves of forbearance during the pandemic have by and large been performing well since leaving their plans.” The sticky part is the odd 300,000 borrowers who have exhausted pandemic-related forbearance programs and are still delinquent. “We’ll want to keep an eye on this population moving forward,” Walden said.

Tight standards still rule in the mortgage industry. Mortgage credit availability is well below where it was just before the pandemic, according to the Mortgage Bankers Association. But the number of applications has dropped by about 50%, and that could mean they become more aggressive in lending to less credit-worthy borrowers. Stay tuned. The biggest problem in the housing market by far right now is home affordability, which is at a record low in at least 44 major markets, according to Black Knight. “While inventory is starting to rise, it is still about half of the pre-pandemic levels,” says Olick.

“Rising inventory will eventually cool home price growth, but the double-digit pace has shown remarkable sticking power so far,” said Danielle Hale, chief economist at Realtor.com. “As higher housing costs begin to max out some buyers’ budgets, those who remain in the market can look forward to relatively less competitive conditions later in the year.”

CNBC, TBWS

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