Yup. We all knew it would eventually come to pass as the residential housing cycle always has been and always will be one cyclical beast, and so is the mortgage credit cycle. Time for a quick check in on the character of mortgage refi activity in 1Q 2008. Why? Because meaningful change has arrived. You can see below that as of 1Q, only 56% of refi activity involved cash monetization. This is the lowest level of cash out activity since the second quarter of 2004. It's absolutely fair to say that the current cycle peak of cash out activity is well behind us now, having falling quite significantly over the last few quarters. The fact that residential real estate prices continue to show us no signs of bottoming as of yet, even on a rate of change basis, it's a good bet that cash out activity falls further from here in the quarters ahead as a percentage of total refis undertaken. Less nominal dollars available to households to fund what is a clear increase in the cost of living vis-à-vis energy and food price inflation. A good thing for macro consumption stateside, or otherwise?
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So in summation, in 1Q we saw 55% of refis extracting cash, 9% of refis done actually lowering loan amounts, and 36% done at existing loan levels. Without question this character change is in good part being driven by the refis being done due to forced adjustable mortgage loan interest rate resets we all know are peaking. Have no fear, as per the more than well known numbers; the majority of option ARM loan resets peaks in the late first to early second quarter of next year. In case you missed this year’s mortgage rate reset festivities, you still have yet another chance to grab a first row seat in early 2009.
As a quick tangent, we need to remember that we are experiencing a historic peaking in mortgage loan rate resets right now in terms of nominal amounts of individual real estate loans facing this very circumstance. The revenge of the adjustable mortgage rate reset product? You bet. But what is also clear is that set against this historic number of loan rate resets, actual mortgage refi activity is nowhere near historic levels. The chart below shows us that mortgage refi activity began to pick up a bit late last year and was strong into the beginning of the first quarter. The actual refi app count has peaked so far in the last week of January of this year. But from there, the drop off in refi app count has been very meaningful. In recent weeks, we are running near the lows of the post 2001 recessionary period. This simply does not equate with the rate reset need. Either a good portion of the rate reset mortgages are stuck with higher payments, unable to refinance, or they are walking.
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Is this what should be happening with the refi application body count set against historic adjustable mortgage rate resets occurring right now? Intellectually, one sure as heck would think not. So we believe this is quite the loud statement regarding the ability, or maybe even more importantly the desire, of those facing mortgage rate resets to actually refi. Yes, we know mortgage credit has tightened up quite a bit, so for many the actual ability to refi simply is not there. Secondly, those simply walking away from underwater mortgages are increasing. Let's face it, when you have headline poster child examples such as the Jose Conseco's of the world apparently flashing a badge of intellectual economics honor by refusing to make good on personal mortgage credit commitments due to residential real estate price declines, in one sense the walk away is becoming socially acceptable. Something that has to keep financial sector executives whose balance sheets are loaded with mortgage backed paper up a good bit of the night.
According to the folks at RealtyTrac, the US foreclosure rate is running a 48% year over year rate of change increase as of the end of the first quarter of this year, dovetailing into the period under review for refi activity. On an annualized basis, March foreclosure numbers are running at a rate of 3.1 million. Not a fun number. And, of course, the increase in the monthly foreclosure rate is paralleling the historic peaking of adjustable mortgage rate resets. Massive coincidence, right? Get this, RealtyTrac tells us that in May alone, one in every 481 homes in the US went into foreclosure.
Interestingly, the average age of a refied loan in 1Q dropped very meaningfully from 3.6 years in 4Q to 2.2 years. To us, this simply reinforces why the cash out activity has likewise dropped significantly. Although this is a very broad generalization, through the end of last year there were plenty of folks still sitting on price gains that chose to take additional cash out in the refi process for really whatever reason. But as residential real estate prices have accelerated to the downside in the current quarter, there is ever less equity to cash out. Alternatively, the 2.2 year average age of loans refied is almost exactly what we would have expected to see in terms of the need to refi as opposed to the desire. After all, just how many 3/1 ARMs were written in 2005? Or 5/1 ARMs written in 2003? Too many, that's how many. It sure looks like the folks that refied in 1Q whose loans averaged 2.2 years needed to go through the process as opposed to wanted to go through the process. This changes the complexion of US residential real estate being used as an ATM machine that has already been underway for some time now.
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Okay, probably the three most important charts of this discussion are below. First, let's set the stage for why we believe the following data is important to review right now. As we all know, the benevolent US government has bestowed upon a fair number of the American populace a 8 billion gift of sorts, called the tax rebate. Remember the number. So to kick things off, below we review the actual nominal dollars extracted in the residential mortgage refi process by quarter since 1993. This is probably the most important data as we get down to dollars and cents, and away from the more ethereal view of life in percentages. Point blank, as of the latest quarter, roughly billion was extracted in the refi process. As you can clearly see, this is down from the -plus billion quarterly number seen over the 2006-early 2007 period.
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Of course you can see the punch line coming. The 8 billion in current tax rebates will only offset maybe three+ quarters of diminished refi cash out activity in terms of nominal dollar influence on the general economy. If we really want to stretch for comparative perspectives, the Case Shiller housing price data tell us that on a year over year basis, residential real estate values have fallen close to 15%. As a percentage of roughly billion in household residential real estate assets, that loss in value comes close to trillion. A 8 billion tax rebate shot in the arm is going to have a very tough time standing up to the decline in residential real estate values combined with the loss in nominal dollar cash out refi activity clearly well underway at this point. In fact, in the greater picture of household circumstances, the 8 billion is close to being pocket change. And you know, we never once mentioned a word about skyrocketing consumer energy and food costs.
In the past we used to show you the home equity line of credit data, that is before HELOC's fell off the face of the map in terms of magnitude and meaning to US consumer well being. Time to revisit this in tangential fashion. If we look at the quarterly numbers of both cash out refi dollars and HELOC's by quarter over the same 1993 to date period, this is what we get. The important message being, as was pretty much the same case with the data above, we're back to levels seen in early 2001.
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Importantly, we need to remember that it was the US consumer that pulled us through the 2001 recessionette. And it was anomalistic mortgage credit that drove the economic recovery since 2001. The two charts above, at least in my mind, show us why the US consumer was able to pull off this feat. Mortgage credit was accelerating at that time. But in the current environment, the shoe is definitively on the other foot.
Final chart. Cash out refi dollars as a percentage of the year over year change in disposable personal income. We're now below what was seen in the 2001-2003 period, and well off of the highs of 2005-2007. This is how meaningful cash out refis were to household cash flow and financial well being in years gone by. And, of course, this is now in the process of changing drastically. For now, it's just "gone” and "bye."
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Done. The important issues are that the current tax rebates in no way offset what has transpired in terms of residential real estate equity loss and diminished cash out refis in nominal dollars. The mortgage credit acceleration support to the US economy via US households during the 2001 recessionary period is non-existent at the moment. And finally, actual body count mortgage refi activity in the here and now is much less than would have been expected given that we currently sit at the historic peak of an adjustable mortgage rate reset cycle with a peak in option ARM resets to come in about nine months. In simple terms, the cash out refi cycle has finally turned. We all knew it was simply a matter of time. That time is now. And it could not be worse timing, now could it? Unfortunately, it's simply reflective of the greater cycle of human decision making over time. Are fear and greed really the only constants we can rely upon? Kinda looks that way, doesn't it?
Of course you can see the punch line coming. The $168 billion in current tax rebates will only offset maybe three+ quarters of diminished refi cash out activity in terms of nominal dollar influence on the general economy. If we really want to stretch for comparative perspectives, the Case Shiller data tell us that on a year over year basis, residential real estate values have fallen close to 15%. As a percentage of roughly $20 billion in household residential real estate assets, that loss in value comes close to $3 trillion. A $168 billion tax rebate shot in the arm is going to have a very tough time standing up to the decline in residential real estate values combined with the loss in nominal dollar cash out refi activity clearly well underway at this point. In fact, in the greater picture of household circumstances, the $168 billion is close to being pocket change.
In the past we used to show you the home equity line of credit data, that is before HELOC's fell off the face of the map in terms of magnitude and meaning to US consumer well being. Time to revisit this in tangential fashion. If we look at the quarterly numbers of both cash out refi dollars and HELOC's by quarter over the same 1993 to date period, this is what we get. The important message being, as was pretty much the same case with the data above, we're back to levels seen in early 2001.
