The Mortgage Corner
In addition to very large Consumer credit borrowing that rose $17.2 billion in February (but excludes mortgage lending), the number of new first mortgages increased to a post-recession high in 2015, according to new data from credit rating company Equifax. In fact, it is approaching pre-recession levels thanks to the Fed’s low interest rate policy, which should also help the housing shortage by stimulating more new-home construction.
This is in spite of the Obama Administration’s efforts to downsize Fannie Mae and Freddie Mac, the conforming mortgage GSEs that continue to guarantee the bulk of affordable mortgage loans.
According to the company’s latest National Consumer Credit Trends Report, the total number of new first mortgages originated in 2015 rose to 7.71 million, an increase of 31.6 percent from 2014. Meanwhile, the total balance of new first mortgages was $1.82 trillion, a year-over-year spike of 42.9 percent.
Equifax also found that first mortgage lending to subprime borrowers grew in 2015, with 366,900 loans made – an increase of 25.2 percent over 2014 – and a total subprime balance of $59.7 billion, a 41.3 percent increase.
Why is it taking this long for the housing market to recover? The so-called qualification criteria of conforming loans have become ever stricter since the housing bubble. It is even more difficult to qualify for a subprime mortgage, or the origination totals would be even higher. There has to be some measure of the ability to repay as part of the mortgage application process these days. For subprime mortgages it can be the 12-month total of deposits from non-business bank accounts—no more No Income, No Asset mortgages, in other words. And it has to be a 5 or 7-year fixed rate ARM that converts to an adjustable rate for the rest of the 30 years, rather than the plain vanilla 30-year fixed rate.
“We saw a nice jump in mortgage lending in 2015 that was driven by both rising home-purchase activity and solid refinancing volumes,” said Amy Crews Cutts, Equifax senior vice president and chief economist. “While low interest rates are helping, continued gains in employment and consumer confidence are key. What we are not seeing is any meaningful loosening of underwriting, at least with respect to credit scores. The median credit score on new first mortgages in the fourth quarter of 2015 was 750 and 90 percent of first mortgage borrowers had a score in excess of 646; these values are essentially unchanged for the past three years.”
There is a reason for the higher credit scores. Both Fannie and Freddie add large ‘penalties’ for credit scores lower than 720. This discourages many borrowers, as the US Treasury and the Federal Housing Finance Authority, their nominal conservators, don’t seem to want the GSEs to expand their credit guarantees.
Why? It’s a long story, but the Treasury (the real puppeteer pulling their strings) has said several times they want to dissolve the GSEs, and have Congress replace them with something more streamlined, but without an implicit government guarantee. The catch is it will raise interest rates, since the latest Treasury proposals require originating lenders to put some skin into the game (such as retaining liability even when sold to investors), which defeats the purpose of making home ownership more available.
This overturns the reasons Fannie Mae, created as part of Roosevelt’s New Deal, and Freddie Mac, created post-WWII, were formed. They were never the major cause of the housing bubble, nor contributed to its failure. That was due to the likes of such non-banks as Lehman Brothers and Bear Stearns lending money they themselves had borrowed without sufficient collateral. Why on earth does the Obama Administration oppose the GSEs, as long as there are eligible home buyers wanting affordable housing?
Harlan Green © 2016
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