Zillow Market Pulse: May 20, 2020

May 20, 2020

Purchase mortgage application activity continues its comeback. A growing number of consumers are receiving assistance with their credit card and auto loans. And corporate bond issuance has skyrocketed.

• Another strong week in purchase mortgage applications

  • Applications for home purchase loans rose for the fifth straight week, increasing 6% from the week prior, and are now just 1.5% below last year's levels, according to the Mortgage Bankers Association.
  • Overall mortgage applications fell, as tight lending criteria limited refinance activity.

• A growing number of consumer loans are receiving assistance

  • Nearly 15 million credit card loans are deferring monthly payments, according to TransUnion.
  • 3 million auto loans (about 3.5%) are also receiving assistance.

• Corporate bond issuance is booming

  • More than $1 trillion in investment grade debt has been issued so far in 2020, compared to $1.14 trillion for the whole of 2019.
  • The Federal Reserve's intervention into corporate debt markets has calmed markets but also raised concerns.

 So what?

For the fifth week in a row, a key measure of home purchase activity rose, almost completely recovering to year's levels. Applications for for-purchase mortgages have risen consistently and strongly since beginning to reverse their steep annual declines in mid-April. The recent 6% increase from last week was the latest, and perhaps loudest piece of evidence that the housing market remains a bastion of strength amid an otherwise uncertain economy. The improvement in application activity is even more remarkable given the state of the mortgage market. Lending criteria have tightened significantly in the last month, with lenders limiting their offerings to just the most creditworthy borrowers seeking the most straightforward loans. This trend was emphasized in the MBA's refinance index: Despite mortgage rates falling to all-time lows, refinance activity fell to its lowest level in more than a month, as lenders shied away from refinance loans they deem riskier and less-profitable. It's clear that those fortunate enough to be in a position to buy a home are eager to do so, which is a good sign for the housing market.

Plenty of attention has been paid to the number of mortgage loans receiving assistance in the form of forbearance, but other consumer loans are also offering similar forms of assistance, and participation in these programs is on the rise. Credit-reporting firm TransUnion recently estimated that about 3% of all credit card loans – nearly 15 million accounts – are participating in some sort of programs made available by "financial hardship," allowing qualified borrowers to temporarily halt payments. A similar trend was reported for auto loans: About 3.5% of all loans are participating in one of these payment deferral programs, about 3 million loans. At this time a year ago, 0.03% of credit cards and 0.5% of auto loans were participating in these programs. Given the spike in unemployment claims, a sharp increase in these metrics was to be expected. But the report from TransUnion is another example of how consumer debt delinquency rates are primed to rise in the coming months, with particularly at-risk groups likely bearing the most burden.

For the first time ever, the Fed announced in mid-April that it would begin offering aid to riskier financial assets – specifically investment grade and high-yield corporate bonds — in the form of loans. By injecting unprecedented amounts of capital to an array of financial markets, the Fed ensured that ample liquidity remained in the markets and that trading could continue to function. Yield spreads – a measure of a bond's perceived risk – have recovered significantly from mid-March, when they spiked to their highest levels since the Great Recession. But while many are lauding the Fed for its unprecedented actions and crediting it with the fact that markets didn't fall by more or seize up entirely, some are raising concerns about the central bank's foray into riskier assets. Many companies – some of which face severe financial troubles – have since issued record amounts of debt, sensing an opportunity and knowing the Fed will likely step in as a buyer. While raising immense amounts of cash has helped give many companies a lifeline, some worry the move might be putting credit markets on a course for a future wave of defaults. The Fed needed to act swiftly in the onset of the crisis, so unintended consequences were inevitable, but time will tell how these consequences materialize.

 

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