As the Wall Street Journal made clear, 2020 has been the best of times for U.S. residential mortgage lenders.  In its latest financial-stability report, the Federal Reserve assured us that these happy times will not soon morph into the worst of times because U.S. homeowners have far more home equity than they did in 2008, making it easier for borrowers to refinance to lower-cost loans or, in extremis, to sell their homes without resort to short sales or foreclosure and its still more grievous harm.  FSOC’s latest systemic-risk assessment also adopted this “best of times” view and it’s probably true where I live in upper Northwest Washington, D.C., one of the nation’s wealthiest neighborhoods.  Pretty much anywhere that isn’t as fortunate, not so much.

The Fed’s and FSOC’s analytical flaw lies in their reliance yet again on aggregate data.  I’ve said this before, but averages, cumulative totals, and undifferentiated data badly misrepresent financial reality in a country in which the top one percent in late 2019 owned more wealth (home equity very much included) than the bottom fifty percent.  COVID has of course dramatically widened the already-awful income and wealth gaps, making it still more clear that all the dollars of house-price appreciation celebrated in the Fed’s latest wealth report mask hard times for those down below.

Complicating mortgage resilience, household-debt burdens have also dramatically increased for moderate- and middle-income households.  More prosperous families used fiscal stimulus and consumption savings to draw down their credit-card debt, but only 41 percent of households say that they are highly confident they can meet their next rent payment and only 44 percent expect the same for their mortgages according to the most recent Census Bureau data.

One reason the Fed takes so sanguine a view of mortgage-market stability is the low percentage (now just five percent) of borrowers with negative equity and the alignment of overall mortgage debt to house prices now lodged where it was in the “relatively calm” late 90s.  However, only 28 percent of Americans are equity-rich when it comes to their homes, with most of these households older, long-term homeowners on the two coasts where the bulk of post-2012 house-price appreciation occurred.  Many younger families, no matter how affluent, have sharply increased mortgage-debt leverage by virtue of all the new homes bought in the greener pastures in which many hope to wait out the pandemic.  Most of these are trade-up purchases which of course mean that borrowers cashed in the home equity they had to buy the bigger, nicer house they want.  If house-price appreciation grows ever upward, fine; if not, the Fed’s equity data could hit a very hard wall.

And, the U.S. has an acute affordable-housing crisis.  Assume a low- or moderate- or even a middle-income family can’t honor its loan and finds someone to buy its home at a price high enough to discharge the loan.  Then, where do they go to live?  It’s possible that an eviction crisis for renters will lead to housing affordability for displaced homeowners, maybe even in the neighborhoods they would otherwise be forced to leave behind.  Maybe, but maybe isn’t a lot on which to count given the current crisis.  And, even if maybe turns into for sure for displaced homeowners, what happens to the lower-priced homes they leave behind?  More urban wastelands seem likely.

The Fed’s biggest mortgage bright spot is of its own creation:  ultra-low rates that led to the refi boom.  Refinancing an older loan to a new one does give families an additional financial cushion, but that’s only if there’s no equity extraction.  According to Freddie Mac, about one-third of Americans refinanced their loans at balances above their prior mortgage during the third quarter.  This is a lot less equity extraction than late last year – about eighty percent of refis then included equity extraction.  But, it’s still a lot of borrowers taking equity out and leaving themselves, their lenders, and their neighborhoods at heightened risk.

And, of course, refis help only those able to get them.  A recent Federal Reserve Bank of Boston study found “systemic racism” in the allocation of refinanced loans, with a new study from MIT not only validating this troubling finding, but concluding that African-Americans in general pay a lot more than whites to obtain mortgage credit.  Refinancings without equity extraction are a win for the borrower because, if living costs go down, then family economic resilience goes up.  With refis harder to get, mortgages more expensive to service, jobs most at risk, and neighborhoods most precarious, minorities face the greatest challenges of all in a housing-finance system already fraught with hazard.