By Ray Birch
PLANO, Texas—There is good and bad news for mortgage lending this year, according to one economist, who is cautioning a significant “course correction” in home values may be looming.
“First mortgages will more than hold their own with quarterly growth increasing 20% by end of the year, whereas there’s still some room for refis to help cover purchase applications,” predicted Brian Turner, president and chief economist of Meridian Economics. “Purchase apps will remain around one-million per quarter with refis possibly doubling, reaching 30% of total applications. There’s more growth demand expected in HELOC and HEL loans in 2024-25, as people's equity has benefitted due to the over-valuation of homes and people catching up with post-COVID improvements.”
Turner said HELOC growth could markedly increase during 2024, in part due to cash-out refinances not being attractive in a higher rate environment.
“But there’s still room for people to tap their HELOC or HELs, if for anything but to pay down on exorbitant credit card debt that has once again amassed to historical levels,” he said. “More members are living a paycheck-to-paycheck existence due to elevated inflation, as prices today are 20% higher than three years ago. They are also tapping into savings to meet normal expenses that have seen remarkable increases in all core areas—food, shelter, utilities and medical elements.”
Turner is advising credit unions to keep their eyes open for signs of any upticks in delinquencies in first mortgages and HELOCs.
“Credit unions should be paying attention to overall credit mitigation,” Turner said.
Card Delinquencies Rise
Turner said his concerns are driven in part by credit card outstandings that have once again reached historical levels, while card delinquency has nearly doubled within just the past few quarters.
Brian Turner
“More credit unions, too, are issuing 84-month vehicle loans, thinking it helps the members’ affordability in the current rate environment. But, in fact, it’s worse for members’ finances and for the institution’s risk management because it increases the impact that future write-offs might have upon default,” he told CUToday.info.
Turner noted that, typically, a 48-month loan amortization moves closer to the change in market value of a vehicle.
“As the industry has shifted to 60, then 72 and now 84 months, for the latter it takes up to nearly 72 months for the loan to catch up with its market value,” Turner said.
Staying Put
Meanwhile, Turner pointed to a scenario that has created challenges across the real estate market, as many homeowners are staying put because they have low-rate mortgages.
“This is creating a shortage in inventory, raising market values of existing homes well beyond even the pace of inflation over the past decade, creating great volatility in mortgage rates and keeping more first-time home buyers away from the market,” he observed.
An Increasing Challenge
But even if home were available, buying a home is an increasing challenge for many. Turner pointed out the required average household income to secure a first mortgage has increased nearly $50,000 from four years ago, to $110,000 from $60,000.
“There could be as much as a 15% course correction in the works on home valuations,” forecast Turner. “This has the potential for impacting consumers’ financial profiles, drawing them closer to being underwater. But it also has the potential for impacting credit unions’ loan-to-value profiles, which in turn increases the net effect from any default or future write-off during a period when the organization’s credit mitigation is already dealing with rising delinquencies and foreclosures.”
Moderation Urged
Turner urged moderation in CU mortgage lending this year.
“Eighty-five percent plus of retained marginal loans are underwritten by B-plus or better paper—so, no interest rate risk problems by increasing first lien mortgages or HELOCs in 2024. But it must be in conjunction with the credit union’s liquidity profile. Just don’t overdo growth beyond the credit union’s share growth outlook for 2024.”
Why the Fed Should be Cautious
Turner also believes that if the Fed acts too soon to cut rates—and as CUToday.info reports separately, forecasts for rate cuts in 2024 have been dialed back--could eventually put more upward pressures on delinquencies.
“It’s better to be a little late than to move too soon,” he said. “That’s also the great lesson for both the consumer and for credit unions—to move too soon in anticipation of a volatile event is much more dangerous than trying to be ahead of the game.”