A mortgage boom is underway as American families take advantage of historically low interest rates by refinancing or buying homes, based on a new report from the Federal Reserve Bank of New York.
The volume of new mortgages hit a record in the fourth quarter of 2020, surpassing a 2003 high before adjusting for inflation, the New York Fed said in its latest household debt report and an accompanying blog post. That boom in the mid-2000s has since been blamed for leaving households heavily indebted and contributing to the pain of the 2007 housing bust. But the Fed’s researchers noted that today’s run-up looks different.
This time, both lenders and borrowers appear to be treading more carefully, and mainly households with pristine financial histories are borrowing or refinancing. More than 70 percent of originations in the fourth quarter of 2020 went to borrowers with credit scores over 760, the researchers said.
“Although these two bumps in mortgage originations are similar in magnitude, the composition is quite different,” they wrote. Plus, it’s hard to properly compare origination volumes exactly over time, because rising home prices mean that the increase isn’t apples to apples.
Still, “the trend was unmistakably increasing this year, and to a high level,” according to the post.
Mortgage originations for home purchases spiked in the fourth quarter of 2020, with first-time and repeat buyers borrowing to buy homes at a similar pace. The researchers note that even first-time borrowers look more financially stable now than during the mid-2000s housing boom.
Refinancing has also accelerated. That extends to “cash out” refinances, in which borrowers re-up their home loans and pocket some money against their home equity.
The practice jumped in 2020, with borrowers withdrawing $188 billion in home equity over the course of the year compared with just $119 billion the year before, though “cash-out refinance volume is still notably smaller than what was seen between 2003-06” and came mostly in tiny increments.
“At least half of the refinancers borrowed only enough additional funds to cover the closing costs on the new mortgage,” the researchers noted.
The data as a whole paints a picture in which the mortgage market is booming, the Fed researchers said, but with different — and seemingly more stable — underlying characteristics than the ones that led to the 2007 bust.
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Go to the news source: Americans Took Out a Record Number of Mortgages Last Quarter: Live Updates