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Tuesday, March 14, 2017
More new mortgages are risky ones
March 12, 2017 - Paul Davidson , USA TODAY
Riskier borrowers are making up a growing share of new mortgages,
pushing up delinquencies modestly and raising concerns about an eventual
spike in defaults that could slow or derail the housing recovery.
The
trend is centered around home loans guaranteed by the Federal Housing
Administration that typically require down payments of just 3% to 5% and
are often snapped up by first-time buyers. The FHA-backed loans are
increasingly being offered by non-bank lenders with more lenient credit
standards than banks.
The landscape is nothing like it was in the
mid-2000s when subprime mortgages were approved without verification of
buyers' income or assets, setting off a housing bubble and then a crash.
And Quicken Loans, one of the largest FHA lenders, dismisses the
concerns as overwrought. Still, for some analysts, the latest
development is at least faintly reminiscent of the run-up to that
crisis.
“We have a situation where home prices are high relative
to average hourly earnings and we’re pushing 5%-down mortgages, and
that’s a bad idea,” says Hans Nordby, chief economist of real estate
research firm CoStar.
The
share of FHA mortgage payments that were 30 to 59 days past due
averaged 2.19% in the fourth quarter, up from about 2.07% the previous
quarter and 2.13% a year earlier, according to research firm CoreLogic
and FHA. That’s still down from 3.77% in early 2009 but it represents a
noticeable uptick.
While that could simply represent monthly
volatility, “the risk is that the performance will continue to
deteriorate and then you get foreclosures that put downward pressure on
home prices,” says Sam Khater, CoreLogic’s deputy chief economist. Such a
scenario likely would take a few years to play out.
The early
signs of some minor turbulence in the mortgage market add to concerns
generated by recent increases in delinquent subprime auto loans,
personal loans and credit card debt as lenders target lower-income
borrowers to grow revenue in the latter stages of the recovery.
FHA
mortgages generally are granted to low- and moderate-income households
who can’t afford a typical downpayment of about 20%. In exchange for
shelling out as little as 3%, FHA buyers pay an upfront insurance
premium equal to 1.75% of the loan and 0.85% annually.
FHA
loans made up 22% of all mortgages for single-family home purchases in
fiscal 2016, up from 17.8% in fiscal 2014 but below the 34.5% peak in
2010, FHA figures show.
The share has climbed largely because of a
reduction in the insurance premium and home price appreciation that has
made larger downpayments less feasible for some, says Matthew Mish,
executive director of global credit strategy for UBS. House prices have
been increasing about 5% a year since 2014.
At the same time, the
nation’s biggest banks, burned by the housing crisis and resulting
regulatory scrutiny, largely have pulled out of the FHA market as the
costs and risks to serve it grew. Non-bank lenders, which face less
regulation from government agencies such as the FDIC, have filled the
void.
Non-banks, including Quicken Loans and Freedom Mortgage,
comprised 93% of FHA loan volume last year, up from 40% in 2009,
according to Inside Mortgage Finance. Meanwhile, the average credit
score of an FHA borrower fell to 678 in the fourth quarter from 693 in
2013, according to FHA, below the 747 average for non-FHA borrowers.
Mish says non-banks generally have looser credit requirements, and
lenders have further eased standards – such as the size of a monthly
mortgage payment relative to income – as median U.S. wages stagnated
even as home values marched higher.
Here’s
the worry: If home prices peak and then dip, homeowners who put down
just 5% and are less creditworthy than their predecessors will owe more
on their mortgages than their homes are worth. That would increase their
incentive to default, especially if they have to move for a job or face
an extraordinary medical or other expense, Khater says. Foreclosures
would trigger price declines that ignite more defaults in a downward
spiral.
In turn, funding for the non-bank lenders from banks and
hedge funds likely would dry up, and FHA loans would be harder to get,
dampening the housing market and the broader economy, Mish says.
Guy
Cecala, publisher of Inside Mortgage Finance, says such fears are
unfounded, noting Federal Reserve officials have complained that FHA
loan standards have been too rigorous.
“The non-banks are bringing
a welcome change,” he says. They still must meet FHA standards, he
says, and are regulated by agencies such as the Consumer Financial
Protection Bureau.
Bill Emerson, vice chairman of Quicken Loans,
the largest non-bank lender, says the credit standards of his firm and
his peers are actually stringent by historical standards and appear
looser only because banks sharply tightened their requirements after the
housing crash.
“I don’t have any concerns about” a potential
increase in delinquencies or defaults, Emerson said in an interview. “In
the last three, four years, consumers have more access to credit….and
all of a sudden it’s, ‘Here we go again.’ Likening the mid-2000’s
meltdown to a 100-year flood, he added, “I don’t believe we’re anywhere
close.”
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