Tag Archives: Veterans Administration

Mortgage Credit Conditions Easing

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Home of Easy Credit

The Urban Institute’s Housing Finance Policy Center has released its July Housing Finance at a Glance. It opens,

Our latest update to HFPC’s Credit Availability Index (HCAI) shows early signs that the overly tight mortgage lending standards of the post-crisis period may finally be starting to ease. This HCAI update shows improvements for both GSE and FHA/VA channels. Between Q3 2013 and Q1 2015, the expected mortgage default rate increased from 1.8 to 2.1 percent (17 percent increase) for GSE originations, and from 9.6 to 10.8 percent (a 13 percent increase) for FHA/VA originations. The expected default rate for portfolio loans and PLS channels has remained largely flat at 2.6 percent over this period.

Long overdue, these improvements are largely a result of efforts to clarify put-back standards and conduct early due diligence. While the FHA has lagged the GSEs in these efforts, it has made some progress. Still, more needs to be done, especially to mitigate uncertain lender litigation risk arising out of FHA’s False Claims Act.

These improvements notwithstanding, there is still significant room to safely expand the credit box. Even if the mortgage market had taken twice the default risk it took in Q1 2015, that level would have still been below the level of default risk of the early 2000s. (3)

This excellent chartbook contains many very interesting graphs. I recommend that you look at the National Housing Affordability Over Time graph in particular. It shows that housing “prices are still very affordable by historical standards, despite increases over the last three years.” (16)

State of the Nation’s Housing Finance

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The Joint Center for Housing Studies of Harvard University has released the 2014 edition of The State of the Nation’s Housing. As to the nation’s housing finance system, the report finds that

The government still had an outsized footprint in the mortgage market in 2013, purchasing or guaranteeing 80.3 percent of all mortgages originated. The FHA/VA share of first liens, at 19.7 percent, was well above the average 6.1 percent share in 2002–03, let alone the 3.2 percent share at the market peak in 2005–06. Origination shares of Fannie Mae and Freddie Mac were also higher than before the mortgage market crisis, but less so than that of FHA. According to the Urban Institute’s Housing Finance Policy Center, the GSEs purchased or guaranteed 61 percent of originations in 2012 and 2013, up from 49 percent in 2002 and 2003.

Portfolio lending, however, has begun to bounce back, rising 8 percentage points from post-crisis lows and accounting for 19 percent of originations last year. While improving, this share is far from the nearly 30 percent a decade earlier. In contrast, private-label securitizations have been stuck below 1 percent of originations since 2008. Continued healing in the housing market and further clarity in the regulatory environment should set the stage for further increases in private market activity. (11)

As usual, this report is chock full of good information about the single-family and multi-family sectors. I did find that some of its characterizations of the housing market were lacking. For instance, the report states

Many factors have played a role in the sluggish recovery of the home purchase loan market in recent years, including falling household incomes and uncertainty about the direction of the economy and home prices. But the limited availability of mortgage credit for borrowers with less than stellar credit has also contributed. According to information from CoreLogic, home purchase lending to borrowers with credit scores below 620 all but ended after 2009. Since then, access to credit among borrowers with scores in the 620–659 range has become increasingly constrained, with their share of loans falling by 6 percentage points. At the same time, the share of home purchase loans to borrowers with scores above 740 rose by 8 percentage points.

Meanwhile, the government sponsored enterprises (GSEs) have also concentrated both their purchase and refinancing activity on applicants with higher credit scores. At Fannie Mae, only 15 percent of loans acquired in 2013 were to borrowers with credit scores below 700—a dramatic drop from the 35 percent share averaged in 2001–04. Moreover, just 2 percent of originations were to borrowers with credit scores below 620. The percentage of Freddie Mac lending to this group has remained negligible.

Yet another drag on the mortgage market recovery is the high cost of credit. For borrowers who are able to access credit, loan costs have increased steadily. To start, interest rates climbed from 3.35 percent at the end of 2012 to 4.46 percent at the end of 2013. This increase was tempered somewhat by a slight retreat in early 2014. In addition, the GSEs and FHA raised the fees required to insure their loans after the mortgage market meltdown, and many of these charges remain in place or have risen. The average guarantee fee charged by Fannie Mae and Freddie Mac jumped from 22 basis points in 2009 to 38 basis points in 2012. In 2008, the GSEs also introduced loan level price adjustments (LLPAs) or additional upfront fees paid by lenders based on loan-to-value (LTV) ratios, credit scores, and other risk factors. LLPAs total up to 3.25 percent of the loan value for riskier borrowers and are paid for through higher interest rates on their loans. (20)

Implicit in this analysis is the view that lending should return in some way to its pre-bust levels. But, in fact, much of the boom lending was unsustainable for many borrowers. The analysis fails to identify the importance of promoting sustainable homeownership and instead relies on one dimensional metrics like credit denials for those with low credit scores. Until we are confident that borrowers with those scores can sustain homeownership in large numbers, we should not be so quick to bemoan credit constraints for people with a history of losing their homes to foreclosure.

The Center’s analysis also takes a simplistic view about guarantee fees.  The relevant metric is not the absolute size of the g-fee. Rather, the issue should be whether the g-fee level achieves its goals. At a minimum, those goals include appropriately measuring the risk of having to make good on the guarantee.

Finally, the Center demonstrates symptoms of historical amnesia when it characterizes an interest rate of 4.46% as “high.” This is an incredibly low rate of interest and one would expect that rates would rise as we exit from the bust years.

I have made the point before that the Center’s work seems to reflect the views of its funders. The funders of this report (not identified in the report by the way) include the National Association of Home Builders; National Association of Realtors; National Housing Conference; National Multifamily Housing Council; and a whole host of lenders, builders and companies in related fields that make up the Center’s Policy Advisory Board. These organizations benefit from a growing housing sector. This report seems to reflect an unthinking pro-growth perspective. It would have benefited from a parallel focus on sustainable homeownership.

A New History of Mortgage Banking — Part Two!

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I know, I know, you can’t get enough of this stuff. Yesterday, I noted a couple of highlights from Mortgage Banking in the United States 1870-1940. The last part of the report carefully documents how various players in the urban mortgage market saw their market and their market shares change dramatically as a result, in large part, of the new federal housing finance regime introduced in the 1930s:

All that was required for a historic surge in homebuilding and homeownership was a housing finance system. Local institutional portfolio lenders, now buttressed by deposit insurance and, in the case of S&Ls, the FHLB’s lending facilities, took up most of the business. But the inter-regional flow of credit that arbitraged imbalances across local markets was dominated by life insurance companies and their mortgage banking correspondents. Through 1952, most of these loans were insured under the FHA program, and for good reason — that program had worked well for these intermediaries in the late 1930s. The federally insured and guaranteed home mortgage loan business for life insurance companies and, later in the decade, mutual savings banks preoccupied mortgage bankers until the unusual conditions that fostered the expansion finally ran out in the 1960s. (2)

All of this historical detail brings home a key point for us today. The technical choices we make in structuring the federal housing finance system will alter the incentives of all of the current players. As we watch to see how the Qualified Mortgage, Qualified Residential Mortgage and Ability-to-Repay rules play out when they go into effect next year, we should know that they are likely to shape the mortgage market for decades to come. We already know that some mortgage products will be common and some rare because of these rules. But we should also be aware that some types of originators will be winners and some will be losers because of these rules, although it is too early (at least for me) to tell which will be which. And such an impact may shape the nature mortgage market as much as the types of products that eventually win out when the rules are fully understood by the industry.

A New History of Mortgage Banking

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Yes, I know, a dry subject for most. But for some nerds, there are lots of insights in Mortgage Banking in the United States 1870-1940. The author, Kenneth Snowden, highlights this finding, which gives more credit to the Federal Farm Loan Bank system for the development of the modern mortgage market than do many other histories of the industry:

The Federal Farm Loan Bank system and the FHA mortgage insurance programs that restructured both the farm and urban mortgage banking sectors shared three common features:

+     They each encouraged the widespread adoption of long-term, amortized mortgage loans.

+     They each created mechanisms to stimulate the inter-regional transfer of mortgage credit and the convergence of mortgage rates and lending terms across regions.

+     They each established federal chartering systems for privately financed European-style mortgage banks to create active secondary markets for long-term, amortized loans. (2)

This history provides a lot more detail than one finds in standard histories of the American mortgage market, including much about the early history of securitization. Writers in this area (myself included) tend to think that securitization was birthed in the 1970s, but Snowden documents some proto-securitizations in the early 20th Century. I will come back to this report in a later blog post, but I highly recommend it to serious students of the mortgage markets.