Leverage Doesn’t Help Affordability
A report from National Mortgage Professional. “As if high default costs haven’t been challenging enough for mortgage servicers, a growing number of seriously delinquent loans are Federal Housing Administration products, which require significant upfront investment to resolve. An estimated 25% of all outstanding mortgages that were seriously delinquent at the end of the first quarter of this year were insured by the FHA, up from less than 20% in the first quarter of 2012, according to the Mortgage Bankers Association.”
“FHA loans typically tend to default more than government-sponsored enterprise loans because they are designed to be more affordable to borrowers by offering lower down payment and credit score requirements. But market conditions that changed during the most recent housing boom-and-bust cycle have made the trend more pronounced.”
“At one point during this cycle, FHA’s share of defaults dropped below an estimated 10%. So the increase in FHA default share to nearly a quarter of the market has been a shock to the servicing industry, particularly those servicers that entered the market when FHA defaults were low. ‘They don’t know how to service FHA loans, and it’s hitting them in masses,’” said Matt Martin, CEO of Chronos Solutions, a mortgage industry vendor that offers FHA foreclosure property services.”
“Also worth noting that while the share of FHA defaults is high compared to recent history, it’s still below what it was before the anomalous housing boom in 2005. But during the Great Recession and its aftermath, many loss mitigation options and regulations that didn’t previously exist came into being and have challenged the market’s historical assumptions. ‘With the rapid increase in FHA lending that began in ‘08, really ramped up in 2009 and then remained elevated in 2010, 2011; many of those loans are five-, six-years-old and, if they’re still outstanding, they are hitting usually their peak levels of risk for foreclosure,’ said Frank Nothaft chief economist at CoreLogic.”
From Banking Exchange. “Is mortgage credit headed for a quality dropoff? Or is it already here? Edward Pinto and Stephen Oliner of the American Enterprise Institute’s International Center on Housing Risk recently reported their analysis of nearly 21 million agency loans and noted several trends toward risk. Among their findings: The National Mortgage Risk Index (NMRI) for the FHA and the Rural Housing Service continues to rise and peaked in June.”
“‘Unless household income accelerates, then we will have to have an increase in [government] leverage from what’s already a high level,’ Pinto said.”
“The pair’s research covered 9.5 million purchase loans and almost 12 million refinance loans made from November 2012 until June 2016. Another concern is the number of risky loans compared to the level conducive to long-run market stability. Low-risk loans accounted for just 37% of June’s volume. For first-time buyers, the low-risk share was only 23%. Part of that is due to the continuation of credit easing. The largest share of loans—more than 40%—are classified as high risk, which is ‘not an indication for a stable market in the long run,’ Pinto said.”
“Oliner said the key risk factors for loan default are: Credit scores below 660. High debt-to-income ratios. Down payments of 5% or less. Oliner said all three factors have been on the rise since 2013. ‘An increasing share of loans have all these characteristics and are on 30-year terms,’ Oliner said. ‘So with a low down payment and a 30-year loan, a buyer has very little equity going in and none for a long time afterward.’”
“Additionally, the growing number of non-bank loan originators has contributed to the rise in overall risk, according the AEI experts. ‘There wasn’t a lot of difference in 2012, but by time of the latest data, that gap [between banks and non-banks] had widened dramatically,’ Oliner said. ‘Banks have been reducing risks, mainly by shifting away from subprime borrowers and lower down payments, while nonbanks have been lowering standards for every one of the risk factors.’”
“Not only are they offering riskier loans; they are offering more of them, with nonbanks having gone from a 28% market share of purchase loans to a 58% share.”
“Citing the decades of research his colleague Ed Pinto has done in housing and loan risks, Oliner concluded the report by pointing out that those who forget history are doomed to repeat it. ‘This is a usual historical cycle,’ he said. ‘We’re heading in a direction that is not going to end well unless we can cap leverage. It doesn’t help affordability.’”
The Holland Sentinel in Michigan. “Low inventory and high demand among homebuyers are pushing the housing market in Holland and Zeeland to an unusual place for the area, according to local agents and brokers. ‘If you’re a seller, take advantage of that,’ said Doug Klaasen, Realtor at Keller Williams in Holland and president of the West Michigan Lakeshore Association of Realtors. ‘But if you’re a buyer, make sure you’re 100 percent ready to go and be able to make a decision.’”
“The Holland housing market is always relatively strong, Klaasen said. But multiple offers on homes — and homes going for over list price — is a new dynamic to the local market. ‘We’re seeing the most amount of movement in the $100,000 to $200,000 range,’ said Sarah Lilly, associate broker with Five Star Real Estate Lakeshore. ‘Homes are moving very quickly and sometimes with multiple offers, and sometimes go for over list price.’”
“Housing prices have rebounded well from the Recession, Klaasen said, explaining in some places sale prices are now higher than they were pre-2008. The average home sale price in the Holland area is about $220,000, an increase of eight percent from last year, Klaasen said. Average sale prices also rose seven percent from 2014 to 2015. ‘That kind of increase isn’t sustainable long-term,’ Klaasen said, urging caution.”
The Columbian in Washington. “Real estate agent Tracie DeMars pulled her car up to a small, one-level house set back from the street in the Fruit Valley neighborhood. When it was built in 1942, the two-bedroom, one-bath house with 828 square feet was an average-size new home. ‘This is what many buyers want: a nuclear ranch with a little bit of yard,’ said DeMars with Re/Max Equity Group. ‘If a house is decent and in good shape, it’s going to move fast.’”
“Lightning speed is more accurate. Clark County’s real estate market for smaller homes is sizzling. Small pre-owned homes are receiving multiple offers and most often for more than the asking price. Those multiple offers are made within days of the house being listed, and sometimes within hours. This feeding frenzy happens not only in the gentrifying downtown neighborhoods, but also in some of Vancouver’s poorest neighborhoods: Fruit Valley, Rose Village and Harney.”
“The little 1942 house on Unander Avenue in Fruit Valley was listed for $195,000. In two days, there were six offers. The winning offer of $210,000 was $15,000 more than the listing price. That’s $253 per square foot. A few blocks away, DeMars pointed out a three-bedroom, one-bath 910-square-foot ranch that sold for $103,000 in 2010, at the depth of the recession, $160,000 a year ago and $195,000 this spring. ‘The price increases this year are unsustainable,’ DeMars said. ‘We’re quickly getting to the point where first-time buyers can’t afford a home.’”
“Sometimes, first-time buyers can’t afford a single-family home and have to settle for an attached, two-story townhouse. DeMars stopped the car again and pointed to a newer, three-bedroom, two-and-a-half bath townhouse near Burton Road. It had shared walls and a tiny yard. Even the townhouse market is hot, DeMars said. Many buyers who can’t afford a single-family home are having to settle for a townhouse. ‘It’s hard all the way around,’ said DeMars.”
“For a first-time buyer who signs on the dotted line and agrees to pay $200,000 plus decades of interest, it could be home.”
