Recent data on the increasing number of homeowners going underwater on their mortgages points out that the total of outstanding mortgage balances is in a bubble with respect to home values. Banks are looking to resolve this bubble by waiting for mortgage repayment and for house prices to rise. This has been called “extend and pretend”. Some homeowners, on the other hand, are looking to resolve their bubble by strategic default. This refers to the mortgagor walking away from a property rather than continue payments even though they have the cash flow capable of continuing the mortgage payments. This action diminishes the chances of success for the bank strategy.
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The housing market is signaling there will be an economic recession by the 2020 election, according to Benn Steil, director of international economics at the Council on Foreign Relations.
Last week, the 30-year fixed-rate mortgage fell, spurring another uptick in refinance demand, resulting in mortgage applications rising by 0.5%, according to the Mortgage Bankers Association. The organization indicates that on an unadjusted basis, the index crawled forward 1% for the week ending on October 11, 2019. Despite this increase, Joel Kan, MBA’s vice president of economic and industry forecasting, said the ongoing interest rate volatility is impacting a borrowers’ ability to lock in the lowest rate possible.