Mortgages: Too Much Risk?
There’s constant pressure in the mortgage marketplace to make financing quicker, easier and more broadly available. After all, with reduced lending requirements, we did sell more than 7 million existing homes in 2005, which was about 1.5 million more units than we expect to market this year. Surely it would make sense to ease credit standards now to pump up home sales, right?
According to the Urban Institute, there were an additional 5.2 million loans that could have been made between 2009 and 2014 had we used 2001 qualifying standards – standards that created a super-safe mortgage marketplace.
“The market is taking less than half the credit risk it was taking in the pre-crisis period,” said the institute in a 2016 report. “The factors contributing to the tight credit box are complex, ranging from the issue of lender overlays due to repurchase risk, to the high costs of servicing delinquent loans, to fears of litigation by the Department of Justice, the HUD inspector general or state attorneys general.”
But what if we’re having fewer originations today not because loan standards are too tight, but because lenders are simply being prudent? Isn’t prudence a far better financial sin than an orgy of low standards that might lead directly to another mortgage meltdown?
The fastest and surest way to expand the credit box is simply to have mortgages available at low rates, and that’s precisely what we have today. The annual mortgage rate for 2016 was 3.65% – the lowest on record – versus 6.97% in 2001.
If you’re a mortgage investor, it’s not your job to pump up home sales. Instead, it’s to find the best combination of risk and reward for your capital in the current marketplace.
Today’s mortgage rates have opened up the real estate marketplace to huge numbers of people who otherwise could never get financing. According to Lawrence Yun, chief economist with the National Association of Realtors, each 0.1-percentage-point mortgage rate increase results in 35,000 fewer sales. If mortgage rates went from 4% – roughly the rate as this is written – to 7%, we could expect to see market activity reduced by 1 million transactions.
Relaxed credit standards
Why are mortgage rates so low? Because investors see little risk in the U.S. housing market as a result of today’s lending standards. In the first quarter of 2016, the foreclosure starts rate was at the lowest level since the second quarter of 2000, according to the Mortgage Bankers Association.
The reality is that lending standards have eased considerably in recent years. The Mortgage Credit Availability Index (MCAI) from the Mortgage Bankers Association was at 174.2 at the start of this year versus 83.2 at the end of 2008.
Are there concrete examples of eased credit standards? You bet. Fannie Mae will now buy loans with 50% debt-to-income ratios without certain compensating factors. Freddie Mac’s Home Possible program allows borrowers to qualify with just 3% down.
“Can we ease lending standards even more?” asks Rick Sharga, executive vice president at online real estate marketplace Ten-X.com. “Absolutely. But the goal of lending is not to increase mortgage production at any cost; it’s to find the right balance between risk and reward.”
Income and debts
The reality is that lenders have every reason to favor conservative application standards because while home prices have soared, incomes are flat and debts are rising.
The National Association of Realtors reports that existing-home prices in June reached $263,800. That’s up 6.5% in a year and represents the 64th straight month of year-over-year increases. The median price for new homes reached $310,800 in June.
Meanwhile, household incomes in 2015 were lower than in 1999, and debts are soaring: According to a May report from the Federal Reserve Bank of New York, total household debt reached $12.73 trillion in the first quarter of 2017, which eclipsed the $12.68 trillion peak reached during the recession in 2008.
As a lender, you have to wonder at what point the combination of higher home prices, rising debts and stalled income represents too much risk. It’s not that lenders are prudent to be mean: It’s because the market has real dangers, and too much credit relaxation could bring us to a new mortgage meltdown. That’s something that benefits neither lenders nor borrowers. – Peter G. Miller
Peter G. Miller is a nationally syndicated newspaper columnist, the original creator and host of the AOL Real Estate Center, and the author of numerous books published by Harper & Row.
Mortgage Credit Risk Increased in Q2
Mortgage credit risk in the second quarter was elevated compared to the second quarter of 2016, due mainly to an increase in condominium sales and investor purchases, according to CoreLogic’s Housing Credit Index.
However, the level of risk was about the same compared with the 2001-2003 period, which CoreLogic considers to be a normal baseline for credit risk.
The index calculates mortgage credit risk using six attributes: credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), investor-owned status, condo/co-op share and documentation level.
In the second quarter, the index reached an overall score of 117, up 20 points from a year earlier.
The loosening was partly due to a shift in the mix of more investor and condominium loans which offset lower-risk signals from the credit score, as well as DTI and LTV attributes, CoreLogic says in its report.
“Mortgage risk for new originations increased modestly in the second quarter of 2017, but much of this rise was due to a small shift in the mix of loan types to more investor and condominium loans, which have slightly higher risk attributes,” says Frank Nothaft, chief economist for CoreLogic. “Despite the somewhat higher risk of new origination loans, purchase mortgage underwriting remains relatively clean with an average credit score of 745 and low delinquency risk.”
Recent Storms, Data Breaches Could Boost Mortgage Application Fraud
The risk of fraud in mortgage applications in August was flat compared with July but up 20% compared with August 2016, according to First American Financial Corporation’s Loan Application Defect Index.
Although application fraud risk held flat for two months, as of the end of August, Mark Fleming, chief economist for First American, warns that it could soon start to increase due to the impact of hurricanes Harvey and Irma.
“The devastating impact of Hurricanes Harvey and Irma on large parts of Texas and most of Florida continues to be assessed,” Fleming says in the report. “Thankfully, recovery efforts are well underway and the rebuilding of homes has started.
“Yet, it should come as no surprise that in the wake of major natural disasters the risk of mortgage loan application fraud increases,” he says. “Hurricanes, and particularly the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition. Evidence from monitoring application defect, misrepresentation and fraud risk after [Hurricane] Sandy in the New York metropolitan area indicates that one should be on the lookout for increased risk in the markets impacted Harvey and Irma.”
In addition, the recent high-profile data breaches that exposed the personal credit information of many U.S. consumers has increased the risk of identity-based fraud and misrepresentation, Fleming says.
The report shows that although the overall risk of fraud in mortgage applications was flat month-over-month in August, it was up 20% compared with August 2016.
Still, it was down 17.6% from the high point of risk in October 2013.
CoreLogic had also recently noted that the risk of fraud in mortgage applications increased 16.9% in the second quarter compared with the second quarter of 2016.
The increase is expected because applications for purchases now make up a greater share of total applications, due to the fact that refinances have been falling due to higher mortgage rates. Applications for purchases generally carry higher fraud risk because borrower information is typically being verified for the first time by the lender.
An estimated 13,404 mortgage applications, or 0.82% of all mortgage applications, contained indications of fraud, as compared with the reported 12,718, or 0.70% in the second quarter of 2016.
During the second quarter, jumbo refinance loans showed the greatest fraud risk.
In terms of the types of fraud risk, occupancy, transaction and income fraud risk all increased year-over-year. The greatest increase was in occupancy fraud risk, which jumped 7.0% in the second quarter compared with a year earlier.
Other types of fraud risk measured in the report are identity, property and undisclosed real estate debt fraud.
Regionally, New York had the highest level of application fraud risk. Florida, which held the top spot for the last several years, dropped to number three, due to a 3% decrease in application fraud risk from 2016.
States with the greatest year-over-year growth in risk included Iowa, Indiana, Missouri, Louisiana and Idaho. Although they have the highest growth in risk, except for Louisiana, the other four states are still outside the top 25 in terms of overall risk.
“This past year we saw a relatively large increase in the CoreLogic National Mortgage Application Fraud Index,” said Bridget Berg, principal, fraud solutions, for CoreLogic, in a release. “If the factors that influenced the increase continue, including a shift to purchase transactions and growing wholesale channel origination activity, it is likely that mortgage application fraud risk will continue to rise as well. Fraud on cash-out refinance transactions and home equity loans may become more of a factor in the coming years as home values and equity rise.”
Average Number of Days to Close a Mortgage Fell Again in August
Refinances represented about 35% of all mortgages originated in August – flat compared with July but down considerably from about 45% in August 2016, according to Ellie Mae’s Origination Insight Report.
The lowest share for this year came in May and June, when refinances comprised about 32% of all loans, according to the mortgage software firm.
The average number of days to close a mortgage fell to 42 – down from 43 in July and down from 46 in August 2016. It was the third consecutive month that the number of days to close dropped.
Adjustable-rate mortgages represented about 5.7% of all loans originated. The closing rate increased slightly to 71.7%.
The average FICO score for all loans closed in August was 724 – the same as in July but down from 731 in August 2016.
About 70% of all closed loans had FICO scores over 700; 71% of purchase loans had FICO scores over 700; and 67% of refinances had FICO scores over 700.
Housing Starts Dipped in August, Due To Hurricane Harvey
Housing starts dipped in August, due primarily to the impact of Hurricane Harvey, which struck the greater Houston area for several days starting on Aug. 25.
Housing starts nationwide were at a seasonally adjusted annual rate of 1.180 million, a decrease of 0.8% compared with a revised 1.190 million in July but an increase of 1.4% compared with 1.164 million in August 2016, according to data collected by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
Starts of single-family homes were at a rate of about 851,000, an increase of 1.6% compared with a revised 838,000 in July and an increase of 17.1% compared with August 2016.
Starts of multi-family homes were at a rate of about 323,000, a decrease of 5.8% compared with about 343,000 in July and a decrease of 23.1% compared with a year earlier.
Building permits were at an annual rate of about 1.3 million, an increase of 5.7% compared with about 1.23 million in July and an increase of 8.3% compared with about 1.2 million in August 2016.
Permits for single family homes were at a rate of about 800,000, a decrease of 1.5% compared with about 812,000 in July but an increase of 7.7% compared with August 2016.
Permits for multifamily homes were at a rate of about 464,000 in August, an increase of 22.8% compared with July and an increase of 10.2% compared with August 2016.
Some analysts are forecasting that September’s housing starts rate will be even lower due to the impact of Hurricane Irma in Florida.
“Note that starts will probably be depressed over the near term as construction workers in these already tight markets get drawn into rebuilding projects versus new home construction,” writes Brent Nyitray, CFA, director of capital markets for iServe Residential Lending, in his Morning Report.
Borrowers of All Ages Show Preference for Online Mortgage Experience
Consumers of all ages are desirous of a fully digital, online mortgage experience, a recent survey conducted by Velocify shows.
That includes using online portals as well as alternative communication channels such as chat and text to complete the mortgage process.
The survey of more than 500 consumers who received a purchase mortgage or refinanced a mortgage over the past 10 years shows that borrowers are highly desirous of self-service websites, especially during the research stage of getting a mortgage.
However, as they progress through the application and processing stages, borrowers prefer an increasing amount of help from mortgage professionals through a variety of communication channels, including chat, phone, text and email, the survey finds.
As one might expect, Millennials (under age 35) are more desirous of self-serve options, as well as the use of chat and text, as they move through the mortgage process than Baby Boomers (over age 55).
However, Baby Boomers embraced technology more than expected. Boomers were three times more likely to think technology improved the loan process when they were provided an online portal.
“The most interesting discovery was not how borrower behaviors have evolved, but where they are headed,” says Nick Hedges, president and CEO of Velocify, a provider of sales lead acceleration software to the mortgage industry, in a release. “The trend line in our data shows that all borrowers, regardless of age, have a strong preference for more online and digital interaction with their lender.
“To succeed in this environment, lenders have to put the borrower at the center, which means an easy interface that offers transparency into the entire loan lifecycle, but with humans behind it,” he adds.
The full survey results are packaged into a report titled, “The Digital Mortgage Experience: A Study of Shifting Borrower Expectations.”