Mak­ing home­buy­ers out of renters

Cuts in FHA in­sur­ance costs help first-timers and se­cond-chancers Lower pre­mi­ums “turned around the home­own­er­ship rate”

Bloomberg Businessweek (Europe) - - CONTENTS - −Prashant Gopal and Heather Perl­berg Edited by Pat Regnier

Erin Maude of Kirk­land, Wash., re­turned to home­own­er­ship in De­cem­ber, three years af­ter los­ing her condo. This time around, she’s con­fi­dent she’ll keep her house, which she bought with the help of a 14 per­cent raise and a Fed­eral Hous­ing Ad­min­is­tra­tionbacked mort­gage, which re­quired lit­tle money down.

“I’m very lucky,” says Maude, an air­line mar­ket­ing man­ager. “With­out FHA, I don’t know how long it would have been be­fore I could have saved for a big­ger down pay­ment.”

U.S. home­own­er­ship rates have been slow to bounce back from the fore­clo­sure cri­sis. Now renters—those buy­ing their first home and peo­ple like Maude who are look­ing for a se­cond chance— are wad­ing into the prop­erty mar­ket. For the se­cond half of 2015, the share of house­holds that own their home rose af­ter al­most two years of de­clines.

Some may be re­spond­ing to high apart­ment rents, up 4.6 per­cent in the fourth quar­ter from a year ear­lier, ac­cord­ing to the real es­tate data tracker Reis. The trou­ble is, there are also fewer af­ford­able houses to buy. The in­ven­tory of starter homes (those in the bot­tom third by price) is down 39 per­cent from three years ago, ac­cord­ing to the bro­ker­age Redfin.

The FHA in­sures loans, pro­tect­ing the len­der from a loss if the bor­rower de­faults and al­low­ing for less strin­gent cri­te­ria. In 2015 the govern­ment re­duced pre­mi­ums bor­row­ers pay for that in­sur­ance. FHA-backed mort­gages, used mostly by first-time buy­ers, ac­counted for 22 per­cent of all new loans in De­cem­ber, up from 17 per­cent a year ear­lier, ac­cord­ing to data from El­lie Mae, whose soft­ware pro­cesses mort­gages. Sam Khater, deputy chief econ­o­mist for CoreLogic, cal­cu­lates that be­cause of in­creased FHA loans, more than 250,000 first­time home­buy­ers were added to the mar­ket in 2015.

“The FHA in­sur­ance-pre­mium cut pulled for­ward the day that first-time home­buy­ers came back in a big way and turned around the home­own­er­ship rate,” says Mark Zandi, chief econ­o­mist for Moody’s An­a­lyt­ics.

For a $2,400 monthly pay­ment,

“Since the fed­eral govern­ment is guar­an­tee­ing th­ese loans, there isn’t much mar­ket dis­ci­pline to pre­vent risky loans from be­ing made.” �Stephen Oliner, res­i­dent scholar at the Amer­i­can En­ter­prise In­sti­tute

Maude gets twice as much space and is closer to Lake Wash­ing­ton than she was in the town house she rented for only $400 less. She has a fenced-in back­yard where her dog, Percy, can run. She put 4 per­cent down, more than the 3.5 per­cent re­quired by the FHA.

Af­ter los­ing a pre­vi­ous job and tak­ing a pay cut, Maude lost her At­lanta condo three years ago in a short sale, a trans­ac­tion in which lenders agree to ac­cept less than what’s owed on the prop­erty. By Novem­ber of last year, she was el­i­gi­ble again for an FHA loan.

She bought the Kirk­land house in De­cem­ber, mak­ing a full-price of­fer of $422,000 the day af­ter it went on the mar­ket. She knew that the sup­ply was too tight for her to de­lay. “There are now only two to four houses within 5 miles even on the mar­ket in the price range I was look­ing at,” she says.

Oth­ers haven’t been as lucky. Tough credit stan­dards pre­vented 5.2 mil­lion mort­gages from be­ing made from 2009 to 2014, ac­cord­ing to the Hous­ing Fi­nance Pol­icy Cen­ter at the Ur­ban In­sti­tute. That left fewer fam­i­lies able to buy at an op­por­tune time when homes were cheaper, the in­sti­tute said in a re­port last month.

Crit­ics says the in­crease in FHA loans brings risk that will be­come ap­par­ent the next time the econ­omy tum­bles. “Since the fed­eral govern­ment is guar­an­tee­ing th­ese loans, there isn’t much mar­ket dis­ci­pline to pre­vent risky loans from be­ing made,” says Stephen Oliner, a res­i­dent scholar at the Amer­i­can En­ter­prise In­sti­tute.

CoreLogic’s Khater says loans of all types made in the past six years are “pris­tine” and have the low­est de­fault rates in al­most two decades. Ac­cord­ing to Rob Nun­zi­ata, chief ex­ec­u­tive of­fi­cer of FBC Mort­gage in Or­lando, the new ac­tiv­ity is a sign that lenders are feel­ing more con­fi­dent as the mar­ket re­cov­ers. In the past year, his com­pany has dropped its min­i­mum credit score for an FHA mort­gage to 580 from 640. “Credit stan­dards were a lit­tle too tight,” he says. “Now they’re eas­ing to­ward a more ac­cept­able level.”

The bot­tom line Re­stric­tive credit hin­dered first­time buy­ers. New FHA rules are help­ing them, even as the in­ven­tory of starter homes is low.

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