Despite the significant increase in mortgage originations this year compared with previous years, the total amount of unpaid principal held in lenders' portfolios has basically been flat, according to a report from Equifax.
The credit agency says there are numerous factors that have led to this situation. For one, homeowners have been paying down debt faster through cash-in refinancing or by increasing prepayments. As a larger percentage of homeowners pay off their mortgages, lenders simply have fewer loans left in their portfolios. Helping to drive this trend is the fact that the job market has been improving and fewer Americans are unemployed.
In addition, consumers have been refinancing their existing mortgage debt into lower rates and shorter terms during the past year, as rates reached lows of around 4.0%.
Also causing a decline in the total number of loans held in portfolio is the fact that servicers and lenders are clearing out the last of the foreclosure inventory left over from the crash of 2008. As these loans are converted to bank-owned real estate, the amount of overall mortgage debt is reduced. In September, the severe derogatory rate – as a share of balances – on first mortgages fell to 4.5 basis points (bps) compared with 6.7 bps in September 2014. Severe derogatories (a.k.a., seriously delinquent mortgages) are now at the lowest level since August 2007 as a share of both outstanding loans and balances.
Adding to the problem are recent changes in federal tax policy that removed the exemption on short sale debt forgiveness, which suppressed overall home sales. Sales have recovered this year, but they are barely covering principal repayments, rather than driving mortgage debt higher, Equifax reports in its National Consumer Credit Trends Report.
The stagnation of lenders' mortgage loan portfolios while originations have been soaring has been a major source of frustration for them, Equifax says in its report. In the first nine months of this year, total mortgage originations climbed to $1.2 trillion – an increase of 63% compared with the same period a year ago. In addition, home equity installment loan originations have jumped 20%, and home equity lines of credit have risen 23.3% during the same time period.
Meanwhile, total mortgage and home equity balances were $8.84 trillion at the end of September – nearly identical to figures from the previous 18 months, according to Equifax's data.
‘We have huge growth in mortgage originations with nearly stagnant mortgage balances, which is seemingly illogical,’ says Amy Crews Cutts, chief economist at Equifax. ‘The reasons are many, including changes in tax policy, fluctuations in interest rates and regulatory changes affecting mortgage lending.’Â Â
The firm's data shows balances outstanding for first mortgages peaked at $9.16 trillion in October 2008 and fell to a low of $7.82 trillion in June 2013. Since the beginning of 2014, however, balances have held relatively firm in the range of $8.08 trillion to $8.20 trillion.
‘Across the nation, we have seen growth in total credit that mirrors the overall improvement of the U.S. economy,’ says Cutts. ‘The only exception is mortgage debt, which has remained tepid despite a lively originations market.’