- Shadow inventory – defined as the number of properties in the foreclosure process or in serious delinquency status – fell modestly in June from the prior month and is well below the level of one year ago. The overall trend is far fewer scary properties in the pipeline. That automatically means fewer distressed property sales in the future and should also mean a better appraisal process.
- Here are the fresh numbers according to Black Knight Financial Service:
- Seriously delinquent or in foreclosure was 4.17% in June, up from 4.22% in May, but down from 5.6% one year ago.
- The number of foreclosure starts did increase to 88,314 from 86,258 over the month. But this is not a trend but the timing of when states are initiating the foreclosure process, particularly in judicial states.
- NAR’s data from the REALTORS® Confidence Index shows a marked decline in distressed property sales. The number of foreclosure sales made up only 8 percent of all sales while short sales comprised only 4 percent. REALTORS® who specialized in this market segment should be aware of declining business opportunities in the months ahead. The comparable figures this time next year will be about half of today’s distressed figures.
- Some states have made a spectacular progress. Shadows in Arizona and California have been all but burned off.
- Some states still have looming shadow inventory and hence will be lagging behind in home price recovery. New Jersey and New York are prime examples of where the court system has been very slow to move turn the property into an REO. Anecdotal stories abound of “distressed homeowners” still in a home even after not paying mortgages for more than 2 years. Some are said to game the system, such as leaving the residence and finding a renter: paying no mortgage and collecting rental income. Do not be surprised therefore if current mortgage borrowers in NJ and NY are paying higher mortgage rates to compensate for this type of lender risk.
Presentation by Brooking Institution’s Jennifer Bradley
Summary by Jed Smith, Managing Director, Quantitative Research
The REALTOR® University Brown Bag monthly lecture series features presentations by leading economists, analysts, and social scientists on evolving national and regional issues of interest to REALTORS®. Jennifer Bradley focused on a new approach to revitalizing urban areas and creating more jobs though the integration of technology and community networking:
Ms. Bradley noted that the top 100 U.S. urban areas account for approximately 75 percent of U.S. GDP, 1/8 of land, and 2/3 of the people. She views urban areas as the place where innovation and resources can create jobs. Bradley noted that until recently, the approach to job growth has focused on government spending to prime economic activity. Based on her work with the Brookings Metropolitan Project she has propounded a new job creating paradigm based on innovation and networking.
Bradley notes that metropolitan areas are ideally suited for the promotion of innovation. Urban areas typically have a wide variety of assets—research centers, educational centers, diverse populations, creative individuals, and transportation and other resources. In the examples which she cites she focuses on a key approach for success in job creation: activating networks across organizations to provide a basis for experimentation, innovation, and interpersonal contact, resulting in the full utilization of an areas assets. In short, cities can create value by creating opportunities for networking and experimentation. She indicates that the development of a vibrant networked culture will drive the types of growth discussed in the Metropolitan Revolution.
What Does this Mean to REALTORS®? As leaders in the community with numerous contacts REALTORS® may have an opportunity to help with job growth, community revitalization, and the growth of business—which is good for everybody’s business.
In addition to the talk, the videos referenced in Ms. Bradley’s talk can be found on-line:
- Solid job gains of 209,000 in July, bringing the 12-month tally to 2.6 million. Job gains will be critical for home sales and commercial leasing activity in what will inevitably be a rising interest rate environment ahead.
- Construction related jobs rose by 22,000 over the month and by 211,000 in the past year. Though positive, the construction jobs are not rising as fast as housing starts, which imply there is a labor shortage in this sector. Homebuilders and general contractors will need to pay higher wages to entice people to work in homebuilding.
- A typical worker’s wage rose by 2.0 percent over the past 12-months. Since consumer price inflation is running roughly the same (2.1 percent in July), there is no net gain in purchasing power for consumers. Consumer’s housing costs are rising faster: national rents at 3-to-4 percent and national home prices at 4-to-9 percent depending upon data source. Local market data has larger variations.
- The unemployment rate rose a notch to 6.2 percent. The increase is due to more people re-entering the labor force. The trend of more people searching for work is a good development even if they cannot find a job right away. A healthy person should not be sitting on a couch at home all day.
- The employment rate – how many of the adult population have jobs – stood at 59 percent. Before the financial market crisis in 2008, the employment rate had been 62 to 64 percent. So there is still a plenty of room for improvement in America’s employment situation.
- The latest data is good all-around and we hope the trend continues. But one sad commentary is worth noting. Aside from construction, there is an acute labor shortage in trucking driving. A college degree is not required and annual pay can be $80,000 to $100,000 after putting-in overtime hours. Yet, the trucking industry is having difficult time finding drivers. The reason: drugs. Irrespective of how one feels about drug usage, from the libertarian view of free choice as long as it harms no one to some claims of health benefits, the trucking industry is focused on only one thing: safety! And many applicants, unfortunately, cannot pass the drug test.
REALTORS® generally expect home prices to increase in all states and the District of Columbia over the next 12 months, according to the June 2014 REALTORS® Confidence Index. The median expected price increase is 3.6 percent .
Expected price movements depend on local conditions relating to housing demand and supply, demographics, and job growth. Difficulties in accessing mortgage financing, and modest expectations about overall economic and job prospects are factors underpinning the modest price expectation. The expected price growth was highest in FL, TX, CA, and OR, where inventory remains tight, and where there are strong growth sectors (e.g., technology, oil) and cash sales (FL).
 The median expected price change is the value such that 50 percent of respondents expect prices to change above this value and 50 percent of respondents expect prices to change below this value. A median expected price change is computed for each state based on the respondents for that state. The graph shows the range of these state median expected price changes. To increase sample size, the data is averaged from the last three survey months.
- There was a sharp bounce back in GDP in the second quarter, with a 4 percent growth rate. This assures that a recession is not in the cards and that job gains will continue.
- Gross Domestic Product, or GDP, tries to measure the monetary value of all things produced in the U.S. It also indirectly measures everyone’s income all combined. The fact that it grew solidly on the heels of a measurable decline in the first quarter is reassuring that people’s income and job gains will continue. That in turn will help build an additional pool of home buyers and increase leasing activity in commercial real estate.
- The latest growth was led by solid gains in residential construction (7.5 percent gain) and a respectable growth in business spending (5.5 percent gain). Consumer spending growth was humming along at 2.5 percent. The government spending contribution was modest. The net export situation deteriorated a bit as Americans bought too many foreign-made things.
- Caution Ahead: there was a sizable growth in business inventory. This trend counts as current production but also means there is less need to rapidly expand in the months ahead. GDP growth for the remainder of the year is likely to be 2 to 3 percent. For the year as a whole, accounting for the disappointing first quarter, GDP will likely expand by only 1.7 percent in 2014.
- U.S. GDP growth of 1.7 percent looks puny when compared to the second biggest economy in the world. China is projected to grow by 7 to 8 percent. The gap between the two largest economies will therefore narrow.
- The very fast growth in China is creating many growing pains. Pollution conditions are absolutely awful – just as was the case in the British Industrial Revolution in the past century. Some processed food was found to contain anti-freeze and some pork meat was colored to look like beef. Confucianism is being set aside in favor of materialism. Many women from watching a popular dating show are said to prefer “crying in the backseat of a BMW over laughing on the back of a bicycle.” Not too different from the U.S. reality shows of a similar genre.
- The homeownership rate fell to 64.8 percent in the second quarter. It marks the lowest ownership rate in nearly 20 years. After peaking at 69 percent in 2004, the ownership rate has been steadily falling, at first from the aftermath effects of housing market bubble-crash to the ongoing tight mortgage availability conditions now.
- The falling homeownership in recent years is partly due to the struggles of first-time buyers. Lower wages and larger student debts among recent college graduates have limited the millennial generation from taking advantage of the historically low interest rates.
- Though the homeownership rate fell, it is worth noting that there were more homeowners in the latest data then before. It’s just that the renting population grew faster. Specifically, over the past 3 months, the number of renting households increased by 312,000, while the number of homeowners increased by 54,000.
- The strange pattern of more homeowners but a falling homeownership rate (because of an even faster rise in the number of renters) will continue for the next 2 years at least. That’s because household formation of young adults who had been living with their parents will seek out their own housing with an improving economy, first as renters before making the shift to homeowners. This trend also means that housing demand for both home purchases and rentals will be on the increase.
- Too much homeownership through easy credit can bite back painfully as witnessed in the past decade in the U.S. At the same time, very tight underwriting standards limits many young adults from becoming successful homeowners. It is worth recalling that sustainable homeownership without the bubble and foreclosure can drastically change a country. Think Australia. Former convicts (mostly of minor crimes) when given a land to own were able to transform themselves into responsible citizens. These transcendent experiences of former convicts are the key reasons that the country Down Under came to be one of the wealthiest countries in the world.
- NAR recently released a summary of existing home sales data showing that existing home sales continued to improve in June, reaching an annual pace of 5 million for the first time this year. June marks the third consecutive month of increased sales, and June’s figures represent a 2.6% improvement from last month, though sales are still 2.3% below a year ago.
- The national median existing-home price for all housing types was $223,300 in June, up 4.3% percent from June 2013. June’s data also continues a trend of year-over-year price gains for the past two years.
- All regions showed growth in prices, except the Northeast, which experienced a minor decline of 0.1%. The West continues to maintain the biggest price gain at 7.2% from a year ago.
- June’s inventory figures increased by 6.5% from a year ago – it will take 5.5 months to move the current level of inventory. It takes approximately 44 days for a home to go from listing to a contract in the current housing market.
- Distressed sales are showing signs of thinning out. All cash buyers are still strong, representing 1/3 of the home purchasing population. Home buyers are moving into condos at a higher rate than single family homes while single family prices are rising faster than condo prices.
- Last week NAR released median home price information that showed gains of 4.5 percent in June 2014 home prices compared to June 2013. This gain was slightly higher than the 4.1 percent seen in May and notably slower than double-digit price growth in summer/fall 2013.
- Today, S&P/Case-Shiller released their housing price index for May which showed that home prices grew 9.3 percent year-over-year for the 20-city index and 9.4 percent for the 10-city index. This was the first month in the last 15 months that Case-Shiller showed year-over-year gains of less than 10 percent. NAR data showed that the 11 months of double-digit price gains ended in late 2013.
- NAR reports the median price of all homes that have sold while Case-Shiller reports the results of a weighted repeat-sales index. Because home sales among higher priced properties have been growing more than among lower price tiers, the NAR median price had risen by more than the weighted repeat sales index—which computes price change based on repeat sales of the same property.
- The reason Case-Shiller’s reported price growth is now higher is likely a result of the data lag. Case-Shiller uses public records data which has a reporting lag. To deal with the lag, Case-Shiller data is based on a 3 month moving average, so reported May prices include information from repeat transactions closed in March, April, and May. For this reason, the changes in the NAR median price tend to lead Case-Shiller changes.
- For housing market performance, given recent trends in NAR data, expect Case-Shiller-measured price growth to continue to moderate in the next few months. For those seeking to determine what this means for home prices in their market, contact a local expert who can give you the most current MLS information and put these national headlines in context.
The mortgage market was buffeted by a number of changes in 2013 and 2014 among them higher fees at the FHA. NAR Research’ s second Survey of Mortgage Originators includes questions about the impact of changes to the FHA program on consumers.
Since 2010, the FHA has increased the rates it charges for mortgage insurance. On average, responding lenders indicated that 5.7% of originations were lost because of the increase in FHA fees. The distribution clustered between a response of 1.1% to 2.0% and 6.1% to 7.0%. A loss of 5.7% in sales would correlate to roughly 200,000 to 250,000 home sales lost, near the mid-point of estimates NAR Research produced in April .
When asked how consumers impacted by the increase in mortgage insurance rates responded to the higher costs, 68.4% of originators indicated that they had a client(s) who chose not to buy or to put off buying indefinitely. Nearly as many originators found that their client(s) were able to find funding through VA and RHS, but only 42.1% cited having success shifting their client(s) to conventional financing with private mortgage insurance. Only 15.8% of originators cited that a client(s) could absorb the losses while 10.5% indicated that they had a client(s) who waited to save for a larger down payment.
Higher fees at the FHA have had an impact on affordability. While some buyers were able to shift to other more affordable programs, many consumers were shut out of the market for ownership.
- New home sales slid in June. The decline is not a reflection of slower housing demand, but more related to homebuilders putting up fewer homes. Whatever builders build, they are able to find buyers reasonably quick. But the homebuilding industry has been hampered by a labor shortage and the difficulty of obtaining construction loans.
- Numerically, in June, new home sales fell 8 percent. The decline is inconsistent with existing home sales, which had risen 3 percent. Since the existing home sales market comprises over 90 percent of all home sales, the overall housing market recovery is still intact.
- The decline in new home sales do not reflect a lack of buyers since it takes only 3 months to find a buyer on average now versus 10 to 14 months a few years ago. The decline instead reflects too little new home construction. If homebuilders build 10 homes, then there will be 10 new home sales; if building only 3 homes then there will be 3 new home sales. Housing starts of single-family homes have mysteriously tumbled in the past two months.
- Newly constructed home price is notably higher than that of existing homes. Higher construction costs have opened the gap between the two property types. That means there is more room for existing home price to rise to catch up.
- Big homebuilders are publicly listed and can tap finances through Wall Street. But small homebuilders need construction loans from local banks; the difficulty of obtaining these loans have forced the small builders to be on the sidelines. Knowing this, big homebuilders are quickly buying up empty lots and lands to stake out their claim for the future.
- After the U.S. Civil War, many former union soldiers of Irish heritage roamed across the continent to stake out their claim to land – mostly in empty western Canada. The British Queen Victoria panicked. So she immediately sent token Brits to occupy lands in western Canada. To make absolutely clear that the land belonged to the crown and not to Americans, the very outer western island was given the name Victoria Islands and the province was named as British Columbia. The lesson shows someone will claim that empty desk, empty office, expiring listing, or what not, so make a clever case that it is yours first.
With rising home values and fewer foreclosures, the share of distressed sales to total residential sales continues to be on the downtrend, according to the June 2014 REALTORS® Confidence Index. Distressed sales accounted for 11 percent of sales in June: 8 percent of reported sales were foreclosed properties, and about 3 percent was short sales.
In December 31, 2013, the tax break from mortgage debt forgiven as a result of a short sale expired. About 12 percent of REALTORS® reported that they have experienced a case where a seller decided not to sell due to the tax implications.
- Initial claims for unemployment insurance filed under the regular state programs during the week ending July 19 fell 284,000—the lowest level since 2006. The 4-week moving average also dipped to its lowest level since 2007 to 302,000 claims. Initial claims for unemployment insurance are filed by workers starting a period of unemployment. Fewer initial claims mean fewer layoffs and greater job stability. Most analysts consider a level of 300,000 as an indicator of normal economic activity.
- Initial claims data by state lag a week compared to the national level data. For the week ending July 12, initial claims tallied at 303,000. The largest increases in jobless claims were in NY, CA, GA, TX, IN, and PA. Meanwhile, the largest decreases in jobless claims were in MI, NJ, KY, and OH.
- Although the unemployment rate has been falling towards 6 percent, the pace of job creation needs to gain more steam. The drop in unemployment is in part due to a declining labor force participation, while the employment rate has barely improved. NAR expects 2 to 2.5 million net new jobs this year and the next based partly on the trends in the unemployment claims.
 Since Feb 18, 2006.
 Since May 19, 2007.
WASHINGTON (July 24, 2014) – First-time homebuyers have been largely absent from the housing market in the current economic recovery, but some metropolitan areas – particularly in the Midwest and West – are well positioned to see increases in home-buying from the Millennial generation in upcoming years, according to new research by the National Association of Realtors®.
NAR analyzed current housing conditions, job creation and population trends in metropolitan statistical areas across the U.S. to determine the best markets for aspiring, leading edge Millennial homebuyers. Austin, Texas and Salt Lake City were identified as top standouts for Millennials for having a young adult population with solid job growth rates and still relatively affordable home prices. Seven of the 10 metro areas recognized are in the Midwest and West.
Lawrence Yun, NAR chief economist, says the homeownership rate for young adults under the age of 35 peaked in 2005 (43 percent) and fell to 36 percent in the first quarter of 2014.
“Limited job prospects, student debt and flat wage growth have combined with tight credit conditions and low inventory to price Millennials out of some of the top cities such as New York and San Francisco,” he said. “However, NAR research finds that there are other metro areas Millennials are moving to where job growth is strong and homeownership is more attainable. These markets are well-positioned to soon experience a rise in first-time buyers as the economy improves.”
NAR analyzed 100 metro areas that have a large Millennial presence, solid local job market conditions and strong migration patterns of young adults moving to that particular area to determine the best purchase prospects for young buyers. Housing affordability and inventory availability were also considered.
The best purchase markets for aspiring Millennial homebuyers are (listed alphabetically):
- Austin, Texas
- Des Moines, Iowa
- Grand Rapids, Michigan
- New Orleans
- Ogden, Utah
- Salt Lake City
Other markets with strong potential for attracting Millennial homebuyers include:
- Madison, Wisconsin
- Nashville, Tennessee
- Omaha, Nebraska
- Raleigh, North Carolina
- Washington, D.C.
NAR President Steve Brown, co-owner of Irongate, Inc., Realtors® in Dayton, Ohio, said favorable affordability in these markets will ultimately be met with inevitable life milestones to increase homebuying activity.
“Millennials will eventually settle down, trade their roommates for spouses and want to raise a family,” he said. “As long as median income continues to support purchasing power in most areas, the demand and opportunity will be there for Millennials to purchase their first home with guidance and insights from a Realtor®.”
VIEW FULL RELEASE HERE
In January of 2014, the CFPB instituted the ability to repay and qualified mortgage (ATR/QM) rule. This rule incorporates changes intended to protect consumers and to maintain stability in mortgage lending. This portion of the Dodd-Frank act requires that originators make a good faith effort to verify a borrower’s ability to repay their mortgage and imposes stiff penalties if they do not. The QM rule allows for varying degrees of assumed compliance with the ability to repay rule, which is advantageous to lenders as it allows them to minimize and to budget for potential penalties and litigation expenses. To gauge the impact of the rule, NAR Research conducted a survey of originators three months after implementation.
When asked how they treat non-QM, 68.4% indicated that they do not offer non-QM loans based on investor’s requirements, but 52% did not offer them based on firm policy. Only 5.3% treated non-QMs the same as safe harbor QMs, the same share that hold them in portfolio. Originators were much more willing to produce rebuttable presumption loans with just 22.2% having a firm policy against them, but half of respondents indicated no demand from investors for this product. Rebuttable presumption loans are those that command a higher risk premium or higher rate and are generally considered subprime including borrowers with low FICO scores, low down payment, and/or high debt-to-income ratios.
This difference in treatment of rebuttable presumption loans between originators and investors might speak to the difference in credit risk and buy-back risk these loans pose to originators versus the salability of these loans in the secondary market for pooling. Finally, only 22.2% indicated that they treated rebuttable presumption and safe harbor QM loans the same. The reluctance toward rebuttable presumption loans as compared to safe harbor QM and relative to lending last year may reflect tight current overlays around credit scores or it might hint at a feature of the QM rule that would inhibit an expansion of credit in the future if investors are reluctant to purchase rebuttable presumption loans.
- Inflation is slowly and steadily picking up. Rents in particular are rising at a 4 percent annualized rate. The sluggishness in new home construction assures that rent and the broader consumer price inflation will likely be on an upward trend.
- In June, CPI inflation was up 2.1 percent. Such a rate is a tad higher than what the Federal Reserve likes to see. If sustained or even pick up to a higher pace, then the Fed will have no choice but to raise interest rates sooner than planned.
- One consistent driver of inflation has come from the housing component. Rents are up 3.2 percent from one year ago, the highest in 5 years. Rents on an annualized basis have been trending at 4 percent growth rate for the 4 consecutive months. Such an increase will push up the overall CPI inflation given that the housing component is the biggest weight on the index.
- Home prices according to the Case-Shiller index have been rising at a double-digit rate of appreciation even though NAR’s median home prices are rising now by 4 percent. But home price is not considered part of CPI inflation just as the stock market prices are not included. What is included is something fuzzy called the homeowner equivalence rent – which measures what a homeowner would hypothetically charge to rent out their owner-occupied home. No sane homeowner computes this. However, there are government employees who do this for you. And this homeowner equivalency rent has been rising at 2.6 percent. Given that renters are facing stronger inflation, it seems inevitable that this figure will accelerate higher in the upcoming months.
- One other noteworthy price is the price of energy. Consumer energy prices, including gasoline, are up 3.1 percent. But crude oil prices are up more strongly at 10 percent (West Texas Oil). So there could be stronger consumer energy prices in the near future.
- Some countries’ economies are heavily dependent on oil. If oil prices were to fall meaningfully then it can ruin the country’s economy. Russia is one. The last oil price collapse was in the mid-1980s, which precipitated the eventual collapse of communism. If oil prices were to go down to $75 per barrel, Putin is likely to be history.
The June 2014 REALTORS® Confidence Index (RCI) Report indicates that REALTORS® had a slight dip in confidence about current and future market conditions in June across all markets. Low supply of homes relative to demand, the challenging credit environment, and the continued slow pace of income and job growth were cited as the major factors constraining sales. Given the demand-supply imbalance, home prices generally continued to increase, and properties were on the market for fewer days for the sixth straight month. As always, local conditions vary from market to market.
• People’s view of the economy is turning for the better. A record high stock market and continuing job additions are no doubt contributing to the better feelings. That in turn could move the economy into a virtuous cycle of further improvements since confident people spend more money into the economy.
• Numerically, the consumer confidence index rose to 85.2 in June to its highest reading in over 6 years. However, we should note that the long-term average is closer to 100. That is, consumers are seeing improvement, but we are not yet back to normal average conditions.
• Rising confidence is leading to more purchases of vehicles. Since automobiles and trucks are typically the second-most expensive item that consumers buy, it is hoped that confidence also begins to rub off on those buying the top-most expensive item, which is a home.
• The movements of consumer confidence are one of the cheapest economic stimulus measures. It does not cost taxpayers a dime. At times, a national leader through actions and speeches can lift the national mood, which can subsequently raise economic growth prospects.
• Some claim we all can individually have power over our mood. The great English philosopher John Milton, for example, believed in the power of the mind: “One can make heaven of hell and hell of heaven.” It’s all about the mind. And many research studies have shown that people with optimistic outlook on life generally do measurably better financially and in health than others who are less optimistic.
New lending rules (ATR/QM rule) that went into effect on Friday, January 10th, 2014 requires that originators make a good faith effort to verify a borrower’s ability to repay their mortgage and imposes stiff penalties if they do not. These rules make sense to protect the consumer, but can also give lenders pause.
In April of 2014, NAR Research conducted its second survey of mortgage originators. The study found that some lenders have opted for buffers ahead of the QM parameters. The use of buffers was most common on the 3% cap with 28.6% of respondents employing one. 20% of respondents had a buffer ahead of the 43% maximum back-end DTI ratio and 18% for the boundary between safe harbor and rebuttable presumption QM.
When asked their rationale(s) for using a buffer, 44.4% indicated concern over buy-back risk followed by “concern over ability to discover all aspects of the borrower’s ability to repay” at 38.9%. “No portfolio” was not an issue for this sample and only 16.7% of the sample indicated litigation costs as a driver.
Finally, nearly a third of respondents had not adapted to the QM rule by April of 2014. Once adapted, 22.2% intend to maintain their buffers, while only 5.6% will eliminate them. This pattern suggests that lender concerns could hamper a full expansion of the credit box even as lenders become more comfortable with the QM rule and its risks.
At the national level, housing affordability is down for the month of May and lower than a year ago due to a rise in home prices and slower rising mortgage rates.
- Housing affordability is down for the month of May as the median price for a single family home in the US increased. The median single-family home price is $213,600, up 4.9 % from a year ago. Price gains are continuing to slow down.
- Mortgage rates are up 77 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 179.3 in May 2013 to 159.3 in May 2014.
- While jobs and income levels are up slightly from last year, they are not growing fast enough to offset price increases. Having money for a down payment can still be a big hurdle for potential home buyers who already pay comparable rent payments.
- Affordability is down slightly from one month ago in all regions. The South had the biggest drop in affordability. From one year ago, affordability is down in all regions. The West saw the biggest decline in affordability as a result of having the largest price gain at 8.4 %.
- With rents at a five year high and housing completions low, potential home buyers have good incentives to try to become a home owner.
- What does housing affordability look like in your market? View the full data release here.
- The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
The mortgage market was buffeted by a number of changes in 2013 and 2014, among them higher fees at the FHA and changes to underwriting as required by the Ability- to-Repay and Qualified Mortgage Rules. In April of this year, NAR Research conducted its 2nd Survey of Mortgage Originators. This second installment queried a sample of mortgage lenders about the impact of the ATR/QM rule three months after implementation in addition to questions about the impact of changes to the FHA program.
Highlights of the Survey include:
- Non-QM lending accounted for 1.6% of production by respondents in this sample and 8.3% were rebuttable presumption.
- An encouraging 73.7% of respondents indicated that they had fully adapted to the new rules, well ahead of expectations reported by respondents in the January survey.
- Investor preferences are important. 68.4% of respondents indicated that they did not produce non-QM loans based on investors’ preferences and a surprisingly highly 50% indicated a reluctance by investors to purchase rebuttable presumption QM loans.
- Non-QM lending was restricted to high balance and/or high quality lending.
- Since January 10th, nearly half of respondents indicated they had some issue closing a loan due to the ATR/QM rule.
- For loans that did not meet the 3% cap on points and fees, the most cited method for handling them was to reduce the fees, but second was not to originate the loan. Financing fees was the least frequent response.
- Roughly half of respondents did no use buffers ahead of the 3% cap, 43% DTI, or rebuttable presumption boundary, and 5.3% eliminated them in the three months since inception. Buy-back risk and inability to discover all information about the consumer’s ability to repay the loan were the most often cited reasons for the use of buffers.
- The vast majority, 73.7% of originators have adapted to the rules, but 22.2% of respondents indicated that they would not phase out buffers on QM safe harbor and rebuttable presumption parameters even once they are fully adapted.
- FHA’s premium increases for its mortgage insurance since 2010 and permanent MI policy have undermined an average of 5.7% potential purchases where the consumer could not afford FHA’s fees or conventional financing.
- In most cases, a consumer faced with the higher fees chose to put off the home purchase or were able to qualify for VA or a RHS loan. Conventional financing was cited nearly half as often as an option and originators indicated that it is decidedly more difficult to get financing in the conventional space for a borrower with a higher LTV or lower FICO.
- Finally, roughly 10.5% of originators indicated that the FHA’s 100% mortgage insurance guarantee was not important for lending to high LTV or low FICO borrowers, while 26.3% indicated that they would not lend without it. An additional 57.9% indicated that it was important to different degrees and 5.3% were uncertain.
The survey results suggest that originators have made strides adapting to the ATR/QM rules in the current environment, but buffers and liquidity as well as buy-back concerns may limit expansion of credit to the full credit box. In addition, FHA’s insurance is important for lenders and moves to limit it have and will impact access for some borrowers.