MNI POLICY: 4Q Refi Boom Went To Most Qualified Borrowers -Fed

The current U.S. mortgage refinance boom is benefitting the most qualified borrowers, in contrast to the 2003 refi wave when homeowners with lower credit scores loaded up on debt and later ran into trouble later as home prices fell, according to a new report from the New York Fed.

About 71% of mortgage originations in the fourth quarter went to borrowers with credit scores over 760, compared to 31% in the last mortgage refinance boom in the third quarter of 2003, which contributed to over-leveraged balance sheets as the housing bubble burst, the bank said in a blog post accompanying its latest Quarterly Report on Household Debt and Credit.

U.S. mortgage balances grew by USD182 billion in the fourth quarter of 2020, the most since 2007, amid historically high volumes of originations and low interest rates, the report said. Originations neared USD1.2 trillion in the fourth quarter, the highest single-quarter volume in the Fed bank's data going back to 2000, it said.

Overall household debt balances rose by USD206 billion in the quarter, registering an increase of USD414 billion from a year earlier.

"The COVID pandemic and ensuing recession have marked an end to the dynamics in household borrowing that have characterized the expansion since the Great Recession, which included robust growth in auto and student loans, while mortgage and credit card balances grew more slowly. As the pandemic took hold, these dynamics were altered," the New York Fed economists said in the blog.