Unlike the last recession, weak banks and over-leveraged homes aren’t at the heart of the present economic disaster. A dozen years after the previous crisis, lenders are far stronger and no-doc home loans are history.
But housing still will wreak collateral damage on the economy, warns Mark Zandi, chief economist for Moody’s Analytics. As many as 30% of Americans with home loans, or some 15 million households, could default if the nation’s economy remains closed up through the summer, he estimates.
While mortgage interest rates have been low for some time—the average 30-year loan charges 3.8%, Bankrate says—job losses can overwhelm the ability of many to service their debt, Zandi wrote in a report. “Millions more job losses are likely in coming weeks as additional shutdowns occur across the country,” he said.
At the moment, mortgage payment delinquencies are running at slightly below 4% of all home loans outstanding, a very low level. In 2009, the Mortgage Bankers Association indicates, that topped 10%.
If there’s any good news to the prospect of unmet loan payments, it’s that the new federal rescue bill lets home borrowers postpone payments up to 180 days on federally backed mortgages, while letting them avoid penalties and getting dinged on their credit scores.
Bank of America, for one, has permitted 50,000 mortgage borrowers to delay payments. But eventually a day of reckoning will arrive, and they must pay up.
Apart from traditional banks, other mortgage providers, not benefiting from Federal Reserve support, are at risk, Zandi wrote. As these so-called nonbank lenders get money via short-term borrowings that must be turned over continually, the Fed may need to give them a helping hand, he added.
The housing-related damage from shelter-in-place orders, social distancing, and unconfident consumers could extend throughout the real estate industry, Zandi went on. These factors “will create a perfect storm for both home sales and residential construction activity in the second quarter,” he predicted.
Indeed, home loan applications are dwindling fast, he pointed out. A National Association of Realtors survey found that half of all Realtors had seen markedly less interest from buyers in March. The impact also will be severe in the home construction realm as new houses remain unbuilt, Zandi wrote.
The situation is a “bad omen of housing activity to come over the next couple of months,” usually a hotbed of home buying, he said. As a result, Moody’s Analytics projects that existing-home sales will dip to around 4 million units at a seasonally adjusted annualized rate in the second quarter. That would be down from the current 5.4 million-unit rate and near the lows of the 2008-2009 financial crisis.
This would absolutely destroy the payments system for mortgage lending in our country if it happens. It would be a real estate crisis far, far worse than 2008. The Mortgage Bankers Association already sent a letter to the chairman of the Federal Reserve explaining as much last month.