For the first time since January 2012, the Buyer Traffic Index, which captures on the aggregate how REALTORS® viewed traffic conditions in their markets, dropped to 44 in September (55 in August), according to data from the September 2014 REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index. An index below 50 indicates that more REALTOR® respondents viewed their local traffic conditions as “weak” compared to those who viewed conditions as “strong” or “moderate.” The higher the index, the more respondents there are with “moderate” or “strong” outlook.
By state, buyer traffic strongest in North Dakota and in D.C. as well as states in the West, South, and in the Great Lakes. Buyer traffic was generally “weak” in many states in the North East and Mid-Atlantic.
 The buyer and traffic index by state is based on data gathered from the last three surveys to accumulate enough observations for each state.
- Today, S&P/Case-Shiller showed that home prices grew 5.6 percent year over year in August for the 20-city index while the 10-city index showed a gain of 5.5 percent. The newer Case Shiller monthly national index showed a gain of 5.1 percent year over year in the August.
- Headlines seem to be focusing on the slow-down in prices as if it is a bad thing, almost as if we are beginning another housing correction. Here is another perspective: for now, prices are still growing but at a healthier, slower pace. There is a big difference between slow growth in prices and price declines. In the latter situation, home owners are losing equity and the monthly mortgage payments may not help them build up equity faster than it is being lost to home price declines. In the former situation, home owners are gaining equity from price growth AND from paying their mortgage each month, though they may not be accumulating equity quite as quickly as they did when home prices were gaining at a double digit pace.
- The slow-down in price growth is only just now bringing appreciation back into a more normal, sustainable level of growth. Because the housing market overshot on the downside (prices corrected to levels that were unsustainably low), it was not alarming to see double-digit price growth in housing last year, but that trend cannot continue indefinitely unless incomes grow commensurately (and in case you missed those headlines, income growth has not grown at anywhere near that pace.)
- The good news is that no matter the measure used to evaluate home prices, we are seeing the same trend: a return to a more normal level of price growth. This slower pace of growth is good for buyers without harming current home owners. Market fundamentals of income growth and construction should keep supply and demand balanced enough to foster continued, normal growth of prices going forward.
- Last week NAR released median home price information that showed gains of 5.9 percent in September 2014 home prices compared to September 2013. These gains followed NAR’s estimate of 4.5 percent gains for the year ending in August 2014. September was the 6th consecutive month of housing price gains in the 4 to 6 percent range, what is typically considered normal, and notably slower than double-digit price growth in summer/fall 2013.
- Also last week, the FHFA released their housing price index data for August. FHFA’s data, like NAR’s, showed continued but decelerating home price gains. FHFA estimated growth of 4.8 percent for the year ending August 2014.
- NAR reports the median price of all homes that have sold while FHFA and Case-Shiller report the results of a weighted repeat-sales index.
- The reason Case-Shiller’s reported price growth is higher than NAR’s 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 August prices include information from repeat transactions closed in June, July, and August. For this reason, changes in the NAR median price tend to lead Case Shiller changes.
- FHFA sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing. Sometimes, these non-Fannie and Freddie financed purchases have more volatile price trends.
- Given recent trends in NAR data, we expect Case Shiller- and FHFA-measured price growth to continue to moderate in the next few months.
- For those interested in the local perspective, stay tuned for NAR’s metro home price release out later next week or contact a local expert who can give you the most current local MLS information and put these national headlines in context.
REALTORS’® confidence about the outlook for the next six months for single-family homes is still generally “moderate” in many states, according to the September REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index .
The graphs below show a measure of REALTORS’® confidence for the single family residential market on a state-by-state basis. An index above 50 indicates that there are more respondents who viewed their markets as “strong” or “moderate” compared to those who view them as “weak.” The higher the index, the more respondents there are with “moderate” or “strong” outlook.
Many states had an index greater than 50, the highest in North Dakota and the District of Columbia, states with strong economic and job growth.
REALTORS® Confidence Index: Outlook in Next Six Months for Single-Family Homes Based on July 2014-September 2014 RCI Surveys
 The market outlook for each state is based on data for the last 3 months to generate enough observations for each state.
- There is no consumer price inflation to speak of – as of yet. Even the expectation of future inflation rates remains low. This is the key reason as to why mortgage rates remain at historically low rates and why the cost-of-living-adjustment (COLA) for social security checks will barely rise next year.
- The latest consumer price inflation in September was up only 1.7 percent. This particular month is the basis for the COLA for many checks issued by the government for the year 2015.
- Because of the falling gasoline prices in the past month, there could be further deceleration in inflation in the upcoming months. But energy prices are always subject to volatile swings. If energy prices measurably turn up due to unanticipated geopolitical events, then the overall inflation rate could be pushed above the Federal Reserve’s desired 2 percent ideal inflation target.
- Another factor that could move higher and hence push up the overall inflation rate is from the housing sector. Rents rose 3.3 percent over the 12 months to September, the highest pace in nearly 6 years. Homeowner equivalency rents, a hypothetical number of what homeowners would receive if they were to rent out their home, are also hitting near 6-year high. Given insufficient new home construction in relation to population and job growths, both rent components are further poised to rise. Given that the housing is the biggest weight to the CPI calculation, the overall CPI could easily kick into high gear.
- Though there has been massive printing of money by the U.S. Federal Reserve in the past few years (to buy government bonds and mortgage backed securities – something known as Quantitative Easing), inflation so far has been very tame. Should inflation at some point pop out, however, then all the borrowing costs including mortgage rates will rise to compensate for the future loss in purchasing power. The likelihood of inflation popping out to 10 percent or higher as happened during the large money printing period of the 1970s is highly unlikely. But a higher inflation of 3 to 4 percent within a year is a distinct possibility. In such a case mortgage rates will commensurately get pushed up.
- The Federal Reserve has many contingency plans in place to assure that recent printing of the money does not lead to high inflation. Just for an interesting historical anecdote and not as a possibility, even a remote one, it is worth recalling the years after the discovery of America by Christopher Columbus. Spain experienced a long period of high inflation. The monetary system at that time was based on precious metals of gold and silver. The large shipments of gold and silver from the New World to the Old World resulted in too much metal-based money chasing after too few goods (since many Spaniards stopped working to live the easy life). The result was too much inflation and Spain defaulted on sovereign debt several times. As one historian puts it: “The new world conquered by Spain, has now conquered Spain in return.” Common sense says that the greatness of a country is determined by how hard people work and not by how easy it is to obtain currency.
The REALTORS® Confidence Index decreased in September 2014 compared to August 2014, according to data from the September REALTORS® Confidence Index Survey: http://www.realtor.org/reports/realtors-confidence-index.
The index for single family homes dipped to 51 (60 in August). The indexes for townhomes and condominiums remained below 50. An index above 50 indicates that there are more respondents who viewed their markets as “strong” or “moderate” compared to those who view them as “weak.” 
Respondents noted that the market typically perks up in September after a seasonal slack in preparation for the school opening, but reports indicated a flatter rebound this year. Difficulties in obtaining a mortgage under tighter underwriting standards and the decreased supply of “affordable” homes were the major factors cited by respondents.
 An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations or all respondents having moderate (=50) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.
After nearly three years of deliberation, regulators have finalized an important rule that impacts housing. The Qualified Residential Mortgage (QRM) rule avoids an onerous and costly down payment requirement for consumers and gives creators of mortgage backed securities one less uncertainty on their road to recovery. The immediate impact may be small, but another piece in the glide path for long-term recovery has been laid.
Private MBS and Home Sales
Traditionally banks purchased mortgages and held them in their portfolios. Banks only have so much capital to lend, though. In an attempt to expand the pool of funds, mortgage backed securities, bundles of mortgages, were created and sold to investors beyond just banks.
At its peak, the private MBS market produced nearly $1.2 trillion in MBS annually. Today it is roughly $20 billion. Why? In the mid-2000s dangerous loans like interest-only, those with balloon payments or large resets, and those with no documentation of income, assets or even employment were pushed into private label MBS. Investors who bought these MBS rarely had the details of the loans in them, but were sated by high quality grades from ratings agencies. Eventually the MBS cratered in value as default rates on loans in them spiked.
Why is it important to restore the private MBS market? A healthy private MBS market creates competition to government financing, expanding the total pool of funds for homebuyers and putting less tax payer money at risk. A healthy private market can also foster innovation.
The Dodd-Frank legislation specified two rules that would impact the real estate industry: the qualified mortgage rule (QM) and the qualified residential mortgage rule (QRM). The QM rule was finalized in January and is intended to protect consumers. It does so by restoring and canonizing traditional underwriting like requiring proof that a borrower has the Ability to Repay (ATR) a mortgage and banning certain risky products. The QRM rule, though, is intended to protect investors. It requires all issuers of MBS to hold 5% of what they make unless they meet a standard of quality and low risk. Thus, combined the two rules work to protect the sources of financing funds and the recipient of those funds; homebuyers.
The final rule made the standard of quality for exemption from risk retention the QM rule. Thus, if a loan meets the underwriting of the QM rule, then it meets the QRM rule and the MBS issuer does not have to hold a stake in it. If it doesn’t comply with the QM rule, the issuer must hold 5% of the MBS for 5 years or until a majority of the outstanding balance is paid off. The bulk of defaults usually occur in the three years following origination.
Impact on the Consumer and REALTORS®
What does the final rule mean for consumers and housing? There will be a small initial impact…and that’s a good thing. The FHA is exempted from risk retention as are the GSEs while in conservatorship and combined they account for nearly 85% of purchase mortgages. But the GSEs and FHA produce QM loans. Research has demonstrated that QM-compliant loans originated from 2001 to 2008 performed better than conventional, prime loans through the crisis. Compensating factors like those employed by the GSEs would likely have improved that outcome.
When initially proposed, the QRM rule would have applied risk retention to any loan with less than a 20% down payment as well as a front-end DTI greater than 28% and back-end DTI greater than 36%. Had these requirements not been scrapped 45% to 60% of homebuyers could have been impacted. Risk-retention is costly to the MBS issuer, a 75 basis point or more cost that would have been passed onto the consumer. That is the difference between a 4.25% rate and a 5.0% rate or $90 per month on a $200,000 mortgage financed over 30 years. This cost would have disproportionately impacted first-time buyers as well as the trade up buyers who rely on them.
The higher costs of risk retention would have forced more lending to the FHA maintaining a large government role in the market. Or, if the FHA were restricted by political pressure, borrowers would have been pushed out of the market entirely. The result: fewer home purchases, slower price growth, reduced home construction, less of the expenditures that accompany a home purchase, and a drag on the economy.
Another important aspect of the final bill is that it leaves lenders unaffected as they have been familiar with and adjusting to the QM rule for nearly two years. And with a final rule in place, issuers of private MBS gain more clarity and can focus on expanding their market. The capital needed for risk retention can be difficult to raise, so having risk retention apply to a smaller portion of the mortgage market means that more firms can compete, which is good for consumers.
In the future, mortgages with low documentation and risky products will be limited, less liquid and require higher costs. Non-QM lending was only 2.6% of originations in the 2nd quarter of 2014, and any MBS issuer who wants to incorporate them into an MBS will have to hold 5% of the risk going forward.
The final QRM rule may have little impact on the market in the short term due to the current reliance on government product and tight underwriting. However, measured against the initial proposal, the impact could have been significant. Over time, this rule will prevent abuse while allowing a gradual recovery of private capital.
 The FHA and GSEs can produce loans that are QM compliant with a higher back-end DTI than specified under the regulation. The agencies use compensating factors, though, to manage this risk.
 Roberto Quercia, Lei Ding, and Carolina Reid (2012). “Balancing Risk and Access: Underwriting Standards for
Qualified Residential Mortgages,” UNC Center for Community Capital Research Report, January 2012.
REALTORS®’ assessment of market conditions in September and their outlook for the next six months declined in September compared to August and also for the same month last year , according to data from the September 2014 REALTORS® Confidence Index Survey: (http://www.realtor.org/reports/realtors-confidence-index).
REALTORS® continued to report the difficulty of qualifying for a loan under overly stringent credit eligibility standards. Although mortgage rates continue to be the lowest in decades and homes are still more affordable today compared to the years prior to the Great Recession, REALTORS® reported that there are fewer “affordable” homes for sale for the first-time buyer. With higher inventory and slower demand, REALTOR® respondents expected modest price increases in the coming 12 months.
- Homebuilders were busier in September, digging more dirt and ready to bring more new homes to the market. But construction was tilted towards multifamily apartment units. Single-family home construction still remains well below historical norms. A housing shortage is a definitive possibility next year unless homebuilders get more active.
- In September, housing starts rose 6 percent to 1.02 million. The figure is well below the needed figure of 1.50 million. The laggard is the single-family construction. Multifamily housing starts – mostly of apartments and some on condominiums – are essentially back to normal.
- A robust rise in the number of renters and the rises in rents have led builders to focus on apartments. However, the overall inventory of single-family homes for sale is on the relatively tight side and could quickly move to into a shortage situation if the demand picks up. Home prices could then rise notable faster (say 7 percent in 2015), much higher than what most economists are projecting (current about 4 percent in 2015). Housing affordability will take a hit then. Therefore, more homes need to be built. Ideally, housing starts need to rise by 50 percent from the current levels to reach the historical average of 1.5 million.
- Builders generally do not have problems selling newly built homes. The current supply situation is 4.8 months, which is already on the tight side. But trying to obtain construction loans has been very difficult for small-time homebuilders, with lenders complaining of excessive banking regulation that hinders construction loan approvals. The big-time homebuilders of Lennar, KB Homes, and Toll Brothers get their money to build from Wall Street and are having easy days because of less competition from small builders.
- Another reason for sluggish recovery in the single-family housing starts is due to labor shortage. The following anecdote perhaps says it all. A police officer bought a new home in Florida. He wanted to check up on the progress. When visiting the construction site in his police cruiser, there was a scramble of workers running away. Evidently, some of the workers were undocumented persons. Then the question should be why aren’t more American citizens willing work in construction?
- Oil prices have tumbled in the past month, and the reasons are due to supply and demand. North Dakota is producing oil like mad, now the second biggest oil producing state after Texas, surpassing Alaska. On the demand side, Europe is not growing and may even be slipping into a recession. Less production means less need for oil.
- From near $110 per barrel one year ago, the crude oil price has fallen to $84 on the London Exchange. American produced oil is priced a bit less, at $80 recently because North Dakota oil is not getting exported and hence staying put as extra supply in the U.S. market.
- Falling oil prices are leading directly to lower prices at the pump. Gasoline prices are averaging $2.47 this week versus over $3 a year ago.
- A typical REALTOR® spent $1,860 in the business use of vehicle in 2013. (Note there were heavy users with nearly a quarter of REALTORS® spending over $5,000). If the current low gasoline prices hold for a prolonged period then a typical REALTOR® will spend about $1530, or a savings of $330.
- Natural gas prices are holding and not falling so do not expect a lower electricity bill for those using natural gas as a source of energy.
- Consumers are clear beneficiaries of low oil prices. On the flip side, lower oil prices are not good for producers. Likewise, countries that are oil dependent for their economy will suffer. Venezuela, Iran, and Russia are countries vulnerable to societal meltdown if low oil prices persist. Their currencies have all but collapsed already. For example, one U.S. Dollar could be exchanged for 32 Russian Ruble one year ago. Now, it commands 40 Rubles. This means unpleasant inflation and social unrest ahead for Russia.
- Initial claims for unemployment insurance filed in the week ended October 11 dropped to 287,000, the lowest since April 2000. This puts the 4-week moving average to 283,500, also the lowest since June 2000. A number that is below 300,000 has been the rule of thumb for a level indicating normal economic activity. Fewer claims for unemployment insurance means greater job stability for workers. A solid job history is an important criteria lenders look at when evaluating a loan application.
- With generally fewer claims filed every week, the number of insured unemployed has also been on the decline. As of the week of October 4, there were 2.4 million claiming unemployment insurance, down from about 6.6 million at the height of the housing crisis in 2009.
- For the week of October 4, the states with the largest decreases in claims filed were Oklahoma (-191), Idaho (-123), Nevada (-82), and the Virgin Islands (-11). The largest increases in initial claims were in New York (+4,753), Texas (+1,976), California (+1,825), Florida (+1,743), and Ohio (+1,734).
- Overall, the insurance claims data indicates an improving job market in October and is an indicator that the unemployment rate will continue to hover at 6 percent. About 2 to 2.5 million net new jobs are likely to be added over the next 12 months. NAR expects that the sustained improvement in the job market can support 5 million of existing home sales in 2014.
- At the national level, housing affordability is down from a year ago for the month of August as higher prices make it less affordable to purchase a home despite rates having another slight decline.
- Housing affordability is down from a year ago in August as the median price for a single family home in the US increased from a year ago but declined slightly from last month.
- The median single-family home price is $220,600 up 5.2 % from August 2013 as year over year price gains are currently slowing down. Mortgage rates are down 17 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 159.9 in August 2013 to 157.6 in August 2014.
- Affordability is up slightly from one month ago in all regions, the Northeast having the largest gain at 4.5%. The Northeast experienced a gain in affordability due to slower home price appreciation and favorable mortgage rates. From one year ago, affordability is down in all regions except the North east which had a 5% increase. The Midwest saw the biggest decline in affordability at 2.1 % while the South and the West had minor declines.
- Improvement in wage growth will be good for a change in affordability. As rents continue to rise, there is still hope that the lending restrictions loosen to make purchasing a home more attainable. A recent drop in mortgage applications should reduce the amount of bidders and competition for available inventory. Jobs are moving back to healthy stages as unemployment levels reach a low since 2008.
- 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 number of foreclosed home sales has been rapidly falling and could essentially vanish by next year. Those who specialize in foreclosure sales should therefore look towards other line of business.
- In August, foreclosed sales comprised only 6 percent of all home sales transactions, down from double-digit figures last year and from near 30 percent few years further back.
- In addition to fewer distressed properties on the market currently, there is very little in the pipeline. The number of foreclosure starts is essentially back-to-normal with only 0.4 percent of mortgages undergoing that process. Moreover, mortgages originated in the past four years are one of the best performing with very little defaults.
- We should nonetheless be mindful that the overall count of seriously delinquent mortgages and those homes in some stage of foreclosure process are still above historical normal because some states have been very slow to process the required paper work. For example, some homeowners who have not been paying mortgages for 2 or 3 years are still living in the home in Florida and New Jersey. But the broad figure on seriously delinquent borrowers has been sliced in half over the past three years.
- The bottom line there is that foreclosed sales could be in the 1 to 3 percent next year – essentially back the normal market conditions. Fewer distressed properties will also help with the overall appraisal process of not using bad comparable.
- REALTOR business tip. From time-to-time there will be a homebuyer who takes a very long time to decide. After viewing 30 homes, they will ask for few more, and on and on. One way to help on the decision, according to psychology studies on human behavior, is to provide extreme alternatives that the consumer will certainly not buy. For example, showing a home that is outside of the buyer’s price criteria or a foreclosed home can help speed the decision. Since foreclosed homes are on the decline, one has to use other alternative extreme comparisons.
- A similar decision process applies in politics. Research shows undecided voters wanting to gravitate towards the middle for no other reason than not wanting to be extreme. Therefore a portrayal of political opponent as an extremist will help get votes for your candidate. That is why negative political advertisements, though nasty and unpleasant to view, is said to work in helping undecided voters make up their mind.
According to the first Urban Land Institute/EY Real Estate Consensus Forecast of 2014, commercial real estate fundamentals are projected to continue improving. Vacancy rates are expected to decline for office, industrial and retail properties, while availability for apartments is estimated to rise. Commercial rents are poised to rise for the four core property types in 2014 in the 1.9 percent to 3.8 percent. In 2016, rent growth is projected to range from 2.2 percent to 3.6 percent.
As a significant portion of the data underpinning ULY/EY’s forecast is aggregated at the top end of transactions—above $2.5 million—it points to a brighter commercial environment, especially for top-tier markets. With 90 percent of commercial REALTORS® managing transactions valued at or below $5 million, and mainly located in secondary and tertiary markets, the 2014 Commercial Real Estate Lending Survey shines the spotlight on a significant segment of the economy which tends to be somewhat obscured.
Five years after the Great Recession, lending conditions in REALTOR® markets show signs of sustainable recovery. With commercial real estate fundamentals and investment prices on a solid upward trend, lending conditions eased as financing sources broadened in 2014.
For more details on lending conditions in REALTORS® markets, visit: http://www.realtor.org/sites/default/files/reports/2014/commercial-real-estate-lending-survey-2014-10-08.pdf
- Home prices have rebounded nicely with the latest median home price on a single-family home at $220,600 in the U.S., up from around $160,000 just few years ago.
- Such a robust price gain from the trough would imply less affordable conditions. But data is says home buying is still attractive because price gains have been partly neutered by lower mortgage rates. Moreover, income has grown a bit from job creation and falling unemployment rate.
- A typical monthly mortgage payment for recent homebuyers was $867 if purchasing a middle-priced home at the prevailing mortgage rate and having put 20 percent down payment. That translates into 15.9 percent of monthly gross family income now, compared to the average of 21.3 percent over the past three decades.
- The overall debt servicing costs, including mortgage and everything else, have also been trending down and reached historic lows. Low interest rates are also holding down payments on credit cards, auto loans, and other consumer borrowing costs. Moreover, a very high percentage of cash-sales of homes in recent years have held down the overall mortgage debt for the country.
- Are you happy today? Incredibly, research shows one variable that has very high correlation to today’s happiness. It’s about how well one slept the night before. Along with this, be mindful of the common saying: “One who is careful when borrowing has but few cares and fewer sorrows.”
Looking at the interactive graph below, there is an obvious increase of people who started their home search online. Indeed, the share of people using the Internet has increased by 28% since 2004. In 2013, 48% of first-time home buyers and 40% of repeat home buyers used the Internet in their home search process.
Real estate agents are mostly preferred by first-time homebuyers for their initial housing search. Especially last year, there was an increase of the first-time home buyers who asked for the services of a real estate agent. This trend shows how increasingly important is the role of real estate agents when there is limited inventory on the market.
Hover over the line graph to see the distribution for each one of the types of home buyers. If you are interested in a particular type of home buyer, please tap on it (see list on the top right corner of the dashboard).
At state level, in Nevada (2013), Arizona (2011, repeat home buyers) and South Carolina (2004, first-time home buyers) more than 60% of the home buyers preferred to use a real estate agent when they first started their home search. Conversely, New Hampshire (2013), Kentucky (2013, repeat home buyers) and Massachusetts (2013 and 2011, first-time home buyers) had more than 60% of home buyers who started searching for home online.
Please select your state and see what the first step in the home buying process was for your state.
2014 Home Buyers and Sellers Survey will be released in November and we will look for any fresh trends in the data.
Data were used from the Home Buyers and Sellers Surveys for the period 2004-2013. The sample includes home purchases for primary residence use only. In order to be considered, a state needed to have sufficient response data for each one of the types of home purchase (first-time and repeat).
Tight supply and the difficulty in accessing credit were often cited as factors by REALTORS® who did not close a sale in August, according to data gathered in the August 2014 REALTORS® Confidence Index Survey.
About 18 percent of responding REALTORS® reported having clients who could not obtain financing in August 2014, broken down into 11 percent who reported the buyer gave up and eight percent who reported that the buyer will seek financing from other institutions. Appraisal issues were reported as accounting for four percent of failures to close a sale. About 11 percent of REALTORS® who did not close a sale reported that the buyer and seller could not agree on the price, and eight percent reported the buyer lost the bidding competition. “Other” reasons include responses such as no interested buyer or listing, that the buyer is still searching, or that the transaction is in the escrow period or a closing is underway.
The Fair Isaac Corporation recently introduced a new scoring model. The model could help to expand credit to first-time and minority groups. But there is a problem: Fannie Mae and Freddie Mac, who support the majority of the mortgage market, don’t use the new model.
In “FICO 9″, less emphasis is given to the impact of unpaid medical bills and the effect of missed payments on debts that have subsequently been paid off are eliminated. FICO estimates that the new model could improve scores by 25 basis points for the former group and by as much as 100 points for the latter group. Survey participants were asked if this new scoring model would increase accepted applications at their firm.
A 60% majority indicated that the new scoring model would increase accepted applications. Five percent indicated that it would not impact their decision to accept as they use an earlier version of the model, while 35% deferred to their investor’s model or that of the GSEs. This result was a surprise on the upside, but likely reflects the large share of small banks in the survey panel. Small banks can portfolio loans and are less dependent on the GSEs to purchase the loans they underwrite, hence a lower reliance on the old credit models. The same cannot be said for mortgage bankers and banks who originate loans to be sold to the GSEs.
The innovations in FICO 9 are not new though. VantageScore 3.0, the year-old product from FICO’s main competitor VantageScore, had these same methodologies. What’s more, these newer models incorporate utility and rental payments, information that helps lenders to evaluate younger persons and minorities who might not have a history of credit use (e.g. no car, credit card, or mortgage payments).
Work by the Harvard Joint Center for Housing Studies indicates that borrowers with lower incomes as well as minorities face higher rejection rates on their mortgage applications.  NAR analysis of mortgage data from 2007 to 2013 in the HMDA dataset indicate that the share of rejected loans due to credit scores were significantly higher for African Americans and American Indians, ranging from 2.1% to 7.0% higher for African Americans versus Whites over this time frame.
Over the coming decade, minority and first-time buyers are likely to play a more important role in the housing market. These innovative new models that exploit better information could help to usher in their participation.
Mortgages rates on conventional loans could change in the coming months. The Federal agency that regulates the GSEs, the FHFA, is re-evaluating the fees that it allows Fannie Mae and Freddie Mac to charge consumers. With mortgage rates expected to rise in the coming years and looming changes at private mortgage insurers, the outcome of the FHFA’s review could either compound headwinds for the housing market or broaden access to the conventional market.
The FHFA took comments from the public in early September as to whether the current fee structure is appropriate. Last fall, the former director of the FHFA announced an imminent increase in these fees prior to his departure. However, the new Director, Melvin Watt, called for a review of the fees and their impacts on consumers, the GSEs, and the market, which included questions suggestive of a potential reduction in g-fees.
The GSEs don’t originate mortgages. Rather, they package loans into mortgage backed securities (MBS) which they then either swap back to the banks or companies that provide the GSEs with loans or the MBS are sold to the public. The GSEs also provide a guarantee that a buyer of the MBS will receive the full and timely payment from the MBS making the MBS and loans packaged in it more attractive to the investor. This guarantee comes with a fee that is passed onto the consumer. The GSEs pass this charge onto the consumer in three types of fees: a base g-fee that is the same for all borrowers, a loan-level pricing adjustment (LLPA) that rises or falls based on the individual consumer’s risk factors (e.g. FICO, LTVs, etc.), and an adverse market delivery charge (AMDC) which reflects the risk of the local housing market in which the consumer is purchasing.
The changes proposed last fall by former Director Ed DeMarco included:
- A 10 basis point increase (e.g. 0.1% increase in rate) in the guarantee fee for all borrowers
- The current AMDC of 25 bps that applies to all markets would be dropped except for in Florida, Connecticut, New York, and New Jersey
- Finally, a range of fees that apply to specific individuals would increase based on the borrower’s specific FICO score and down payment (LLPAs)
Taken together, these changes would raise costs for every buyer, but most significantly for buyers with a down payment less than 40% and a FICO score between 680 and 740. For some borrowers rates would rise by half a percentage point.
However, Director Watt has hinted at making changes that would help to stimulate mortgage access for borrowers with less than perfect credit and for middle-class Americans. Questions in the FHFA’s request for comment on the matter hinted at a flatter fee structure that would reverse the trend of higher fees for riskier borrowers. Some have argued that as entities fully backed by the Federal government, the GSEs should focus their mission on expanding credit by accepting a lower return on equity than a private MBS guarantor would. A flatter LLPA structure could reduce fees to a significant share of consumers, while a reduction in g-fees would benefit all consumers. As depicted above, the changes proposed in the fall (blue) would raise costs for all borrowers, while a flattening of the structure (red)  could provide modest relief for 50% to 80% of conventional borrowers . For example, a prime borrower with a FICO score between 700 and 719 with a down payment of 5% to 10% would face an increase in monthly payment of $45 under the proposed plan, while a flattening of fees could reduce the cost by $26 or more. The number of consumers that benefit from a flattening of fees could rise if lower pricing draws consumers away from costly FHA insurance.
However, lower fees could also have no impact to consumers if private mortgage insurers (PMIs) raise fees by an offsetting amount as a result of changes also proposed by the FHFA. The GSE’s charter requires PMI on all loans with less than 20% down payment. PMI takes the first loss when these low down payment loans go into default. Several PMIs had issues during the housing downturn and are still paying back insurance claims long overdue to the GSEs. In response, the FHFA imposed the LLPAs and AMDC fees beginning in 2008 in part to shore up losses as the PMIs weakened, essentially taking over the PMI role. To bolster the PMIs and to prevent future losses at the GSEs, the FHFA is reviewing rules that could require the PMIs to hold more capital against potential losses.  Holding more capital increases costs to the PMIs, costs which are passed on to consumers. Compounding the issue is the fact that the PMIs require a higher return on equity for capital than the GSEs. Thus, a reduction in fees charged by the GSEs, could be offset by an increase in fees charged by the PMIs, or worse if the FHFA does not reduce its fees and/or the PMIs require high returns.
To gauge the impact of a reduction in rates charged by the GSEs, participants in NAR’s 3rd Survey of Mortgage Originators were asked whether a reduction in LLPAs targeted at lower FICO and/or higher LTV borrowers would help to expand access to credit. A robust majority of 80% felt that a reduction in rates would help to expand the credit box, while 20% felt that there would be no change.
The economy has shown steady improvement in recent months and most economists agree that this portends an increase in borrowing costs ahead. NAR forecasts the average 30-year mortgage rate to rise nearly a percentage point to 5.1% in 2015  and potential changes at the PMIs could exacerbate this increase. Entry level and minority homebuyers have been slow to join the housing recovery in this low rate environment. With rates forecast to rise, reform of GSE fees may help to improve their participation in housing.
 This is hypothetical example where the AMDC is eliminated and LLPAs for borrowers with less than 30% down payment are reduced to resemble those with a down payment of 30.1% to 40%. Thus borrowers with 35% and 5% down payments would face the same fee if their FICO scores are the same. LLPAs would vary by FICO score according to the current schedule for a borrower with a down payment of 30.1% to 40%.
 Based on estimates of current market GSE market share by Moody’s Analytics https://www.economy.com/getlocal?q=B97EB9C4-9876-47F9-AB47-527469375F89&app=eccafile
 Most of the PMIs have significantly improved their financial footing and argue for reduced LLPAs for that reason alone.
Every month NAR produces existing home sales, median sales prices and inventory figures. The reporting of this data is based on homes sold the previous month and the data is explained in comparison to the same month one year ago. We also provide a perspective of the market relative to last month, adjusting for seasonal factors, and comment on the potential direction of the housing market.
The highlights below show what the current month data looks like in comparison to the last ten August months, and how that might compare to the “ten-year August average”, which is an average of the data from the past ten Augusts.
- Total homes sold in the United States for August 2014 is slightly below the ten year average. A similar trend is seen in the Northeast and the West. The Midwest and the South are the only two regions to show current sales above the ten-year August average.
- Regionally, since the low point of sales in 2010, there had been three consecutive year-over-year gains, but that changed this year with sales declining in August.
- The median home price in August 2014 is higher than the ten-year August average median price for the U.S. and all four regions. The West leads all regions with the highest home prices.
- The median price year-over-year percentage change shows prices having a positive change for the last three years after struggling the previous six years. The West has predominately guided the direction of home prices for the U.S. and all regions over the ten-year cycle. For the U.S. and the four regions the best price percentage increase took place in 2005 except for the South, which had its best gains in 2013. The biggest decline took place in 2009 for all U.S regions except the West, which had the largest drop in 2008 when home values declined more than 20%. This August the Midwest is the only region to have a negative year-over-year price percentage change.
- Inventory of homes for sale for the U.S. is currently lower than the ten-year August average. In 2004, the U.S. had the fastest pace of homes sold while in 2010 the U.S. saw the slowest pace relative to inventory, with the months supply at 11.5. The ten-year August average months supply is 7.4. In August 2014 the figure is 5.5 months supply, close but slightly below a healthy level of homes on the market relative to demand.
View the full PPT slidedeck: August 2014 EHS Vs Ten Year Average
In response to tight mortgage credit, the FHA has announced three changes that it hopes will help to ameliorate lender overlays and broaden access to credit. Specifically, the FHA will consolidate all of its current lending rules into one document that clearly outlines lenders’ responsibilities and penalties for not complying, it plans to increase early reviews of loan files, and finally, it will reduce the fees it charges under certain conditions. In NAR’s 3rd Survey of Mortgage Originators, lenders were asked whether these changes would have an impact.
The FHA’s HAWK program will offer a discount of 10 bps in annual mortgage insurance premium (MIP) and 50 bps in the UFMIP to consumers who complete a buyer education program. The annual MIP would fall by an additional 15 basis points if the borrower is not delinquent after 18 months. The education program is estimated to cost the borrower up to $400 upfront. Respondents were asked whether the incentives are sufficient to attract consumers to the new program. Only 15% of respondents indicated that the incentives would result in increased demand for FHA insurance, while 20% felt that it would help, but could be stronger and 40% felt that they were not. Ten percent of respondents indicated that the upfront costs of the education program were too high for consumers.
In its press release for the HAWK program, the FHA cited research that shows a reduction in serious delinquency rates of up to 30% for counseled borrowers compared to similar borrowers without counseling. Survey participants were asked whether, given the evidence of reduced risk, the HAWK program would affect lenders’ credit overlays on loans originated for the FHA. A 55% majority indicated that there would be no change in access, while 20% indicated that it would ease credit tightness somewhat and an additional 20% indicated that it would reduce overlays significantly.
Finally respondents were asked about FHA’s program for earlier reviews of mortgage files. The program is intended to reduce the risk to lenders of problems in loan files that could lead to subsequent costly put-backs. FHA’s intent is to ameliorate concerns about buy-back risk and to reduce lender overlays in turn. Participants were asked whether the early reviews would impact credit overlays on loans originated for the FHA. Sixty percent indicated that there would be no change, while 15% indicated that the reviews would both somewhat and significantly reduce overlays. Ten percent defer to their investors’ rules.
Survey responses suggest that the changes the FHA is implementing will help. However, while consumer education will help to alleviate overlays, more incentive is needed to attract consumers to the program.