Shrinking Housing Debt Nothing to Fear?

U.S. consumers owed $8.995 trillion on their residential loans at the end of March—the lowest debt figure recorded in almost five years, according to new figures compiled by National Mortgage News and the Quarterly Data Report.

It seems like peak of the market occurred in the fourth quarter of 2009 when consumers owed $10.138 trillion on their homes Since that time, outstanding loan balances nationwide have declined steadily each quarter. Maybe the reason for the reduction in loan balances is loans being removed from the loan tally, plus some consumers that have the ability to refinance are engaging in “cash-in” refis where they bring money to the closing table to reduce their payments even further. According to figures compiled by Freddie Mac, roughly 70% of consumers who are refinancing either keep their loan balance the same or reduce it. In recent quarters that ratio has been as high as 77%. As Freddie Mac economist Frank Nothaft once noted, “This is primarily a 'rate-and-term' market, meaning that the typical homeowner is looking to cut their interest rate or shorten their loan term.”

When Mortgage Servicing Rights ( MSR) begin increasing in size again, that’s a different matter. It likely won’t happen until the housing market stabilizes and more consumers decide to buy new or existing homes—something that will only come when the employment picture improves in earnest.Of the $8.995 trillion in outstanding home mortgages today, 76% are fixed-rate loans, the lowest reading since 2008.Servicing advisors who make their living off of MSRs don’t seem particularly worried about the shrinking residential loan balances. “It’s not something we get hung up on,” said one manager based in Denver. “In time it will start rising again.”Also, investment bankers believe it’s just a matter of time before MSRs begin to rise in value, though they’re not sure when.

As on March 31, Wells Fargo Co. ranked first among all servicers with MSRs of $1.84 trillion, a 2% gain from a year ago. Bank of America ranked second with $1.69 trillion (-16%), followed by JPMorgan Chase with $1.1 trillion (-8%).

The top three servicers, combined, have a market share of 51.57%, according to NMN/QDR. We at PrivoCorp are waiting and watching for the results to improve - and the most important metric we are looking at is the employment picture.