How rising delinquencies and forbearances could affect mortgage rates

Here’s a look at the latest developments in the mortgage market for the week beginning 6/29/20.

• How rising delinquencies and forbearances could affect mortgage rates
• Economic impact uncertain as markets await new COVID-19 case counts
• High demand for starter homes drives prices up
• New data shows a record-breaking home purchase rebound in May

How rising delinquencies and forbearances could affect mortgage rates

Last week saw an increase in the number of loans in forbearance, wiping out almost half of the improvement since its peak. As monthly payments become due at the end of each month, more borrowers are added to this total. Industry leaders expect this number to continue to fluctuate based on how economic hardship impacts homeowners. The number of delinquent loan payments has also risen to its highest level in 2 years. This count, so far, has not included loans in forbearance, since forbearance programs only started around 3 months ago. Going forward, the total number of delinquencies will likely climb due to the inclusion of forborne loans that have gone without payment for more than 3 months; for data reporting purposes, such forborne loans are technically counted as delinquent.

Loans in forbearance are not as valuable to investors as those with on-time payments. This leads lenders to compensate by weighing a borrower’s credit risk more heavily when determining their rate. Even while rates are low, some “hits” to pricing, such as a low FICO score or a high Loan-to-Value ratio, may cause rates on certain loans to be higher than average.

Economic impact uncertain as markets await new COVID-19 case counts

Markets have been volatile over the last few weeks, tracking news on the containment of COVID-19. After spikes in case counts and hospitalizations in southern and western regions, a few of the hardest hit states, such as Texas and Florida, will pause their reopenings. Major economic data this week, like the June jobs report, will show how the recovery was progressing before these pauses; while they may provide some hope for a possible recovery, forward-looking case counts will largely determine how the markets fare.

The severity of the economic impact caused by closures will also be determined by the government's response to this spike in cases. For example, the extra $600/week in unemployment benefits granted by the CARES Act is set to run out at the end of July, potentially impacting 33 million unemployed Americans. Economists predict that failing to extend these benefits would risk losing out on 3.7% quarterly GDP growth, and put 5.1 million jobs in jeopardy. Congress will debate the issue next month, with Democrats arguing to extend the benefits, Republicans in support of phasing them out, and the White House angling for another one-time stimulus check directly to taxpayers.

A wave of new lockdowns, economic hardship, and a more pessimistic outlook may drive interest rates further down — good news for mortgage rates (to a point). Given the volatility around economic and public health indicators, mortgage rates have continued to hover around all-time lows.

High demand for starter homes drives prices up

Historically low mortgage rates have increased the demand for starter homes, especially in suburban areas, pushing the cost of such homes above the rest of the market. This impacts first-time homebuyers in particular with prices for the most affordable homes on the market jumping 5.5%.

New data shows a record-breaking home purchase rebound in May

Pending home sales surged 44% in May as home purchase activity rebounded from Covid-19 lockdowns. The sharp uptick broke all previous records for month-over-month gains according to the National Association of Realtors. While the data suggests a major step toward a healthy housing market, the number of new contracts signed still hangs 5% below last year's numbers.

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