In the third quarter of 2008, U.S. mortgage debt hit a record $9.294 trillion. That extreme marked the end of the housing boom and the beginning of the Great Recession. So, when we hear that U.S mortgage debt has recently surpassed its 2008 peak, it might raise concerns.
But this time around, the homeowners’ debt picture is much better. Mortgage balances have indeed surpassed the peak set 11 years ago as the financial crisis unfolded. Last month the Federal Reserve Bank of New York reported that mortgage debt rose by $162 billion in the second quarter to $9.406 trillion, eclipsing the previous 2008 high.
However, today lending standards are much tighter, delinquent debt is significantly lower, and incomes have grown along with mortgage debt. In addition, the $9.406 trillion is a nominal amount, meaning not adjusted for inflation, so that number is overstated compared to 2008.
Americans’ mortgage debt dropped by about 15% from the 2008 peak to the trough in the second quarter of 2013 and has climbed slowly since then. Total household debt rose by 1.4% from the first quarter to $13.86 trillion, the 20th consecutive quarter of increase.
And while mortgage debt has hit record levels, a counter-balancing housing milestone was also reached: record homeowner equity. So-called “tappable equity” hit a record $6.3 trillion in the second quarter of this year, according to new data from mortgage analytics company Black Knight. Tappable equity is defined as the collective amount of money borrowers could pull out of their homes, while still retaining 20% equity.
Tappable equity grew by more than $335 billion during the 2nd quarter, which is more than double the amount of growth in mortgage debt in the same period. Further, the total is 26% more than the mid-2006 peak of $5 trillion. In addition, roughly 45 million mortgage holders have excess equity, and half of them have mortgage rates higher than 4.25%, making a refinance not only possible but attractive. The 30-year conventional mortgage is now offered around 3.79%.
Indeed, before a recent uptick in late-August mortgage rates, the housing market has experienced “a mini refinancing boom” in 2019, due to falling interest rates.
According to an August 22 report by Black Knight, prepayment activity jumped 26% from June to its highest level in nearly three years and 58% above this time last year as falling interest rates fueled refinancing. Another impressive sign of the housing market’s health: at 3.46%, July 2019’s payment delinquency rate is the lowest of any July on record (dating back to 2000).
Despite sitting on a gold mine of equity in their houses, U.S. homeowners have been relatively disciplined when it comes to tapping that wealth. This also compares favorably to 2008 when lenient lending standards allowed homeowners to take out all their equity, and then some. When the downturn came, it didn’t take much to leave millions of homeowners underwater. Black Knight recently estimated that there are 8.2 million U.S. homeowners who would qualify for and benefit from a refinancing. That is a 6.3 million increase from when rates peaked last year in November 2018.
The steady growth of homeowner equity and the refinancing boom, have been a major positive for both banks and alternative lenders. The big banks have spent much of the last decade pulling back on conventional lending in the face of stricter regulatory standards aimed at keeping them (and the financial system) out of trouble. In consumer mortgage lending, non-bank lenders now dominate, backing nearly 60% of all new mortgages originated. Their share of the mortgage finance market continues to expand. And though Aloha is on the business lending side–to real estate investors–the Fund’s borrowers’ product is nicely finished housing for end consumer buyers, who directly benefit from better affordability and more efficient lending. So ultimately, these higher equity, non-bank streamlining and cheaper money trends help our space as well.
Aloha Fund’s fifty-four month run of positive performance since inception continues. June has the Fund posting its best monthly return in four years, as further progress was made in unwinding and curing non-performing loans on the books. Our track record in this regard continues to produce sound results as requisite downside risk control. This, in turn, enables the Fund to pass along attractive returns and regular distributions to valued investors who want one.
As always, please reach out with your questions and interest in working with Aloha Capital in this excellent investment–Aloha LTD Income Fund.