The Arizona Republic

Risk hits home:

It’s not the mid-2000s again, but analysts worry about defaults

- PAUL DAVIDSON USA TODAY

With riskier borrowers making up a growing share of new mortgages, analysts worry that a spike in defaults could be in the housing market’s future — and that it could slow or derail the market’s recovery.

Riskier borrowers are making up a growing share of new mortgages, pushing up delinquenc­ies modestly and raising concerns about an eventual spike in defaults that could slow or derail the housing recovery.

The trend is centered on home loans guaranteed by the Federal Housing Administra­tion that typically require down payments of just 3 percent to 5 percent and are often snapped up by first-time buyers. The FHA-backed loans are increasing­ly being offered by non-bank lenders with more lenient credit standards than banks.

The landscape is nothing like it was in the mid-2000s, when subprime mortgages were approved without verificati­on of buyers’ income or assets, setting off a housing bubble and then a crash. And Quicken Loans, one of the largest FHA lenders, dismisses the concerns as overwrough­t. Still, for some analysts, the latest developmen­t is at least faintly reminiscen­t of the run-up to that crisis.

“We have a situation where home prices are high relative to average hourly earnings, and we’re pushing 5 percent-down mortgages, and that’s a bad idea,” said Hans Nordby, chief economist of real estate research firm CoStar.

The share of FHA mortgage payments that were 30 to 59 days past due averaged 2.19 percent in the fourth quarter, up from about 2.07 percent the previous quarter and 2.13 percent a year earlier, according to research firm CoreLogic and FHA. That’s still down from 3.77 percent in early 2009 but represents a noticeable uptick.

While that could simply represent monthly volatility, “the risk is that the performanc­e will continue to deteriorat­e, and then you get foreclosur­es that put downward pressure on home prices,” said Sam Khater, CoreLogic’s deputy chief economist. Such a scenario likely would take a few years to play out.

The early signs of some minor turbulence in the mortgage market add to concerns generated by recent increases in delinquent subprime auto loans, personal loans and credit card debt as lenders target lower-income borrowers to grow revenue in the latter stages of the recovery.

FHA mortgages generally are granted to low- and moderate-income households who can’t afford a typical down payment of about 20 percent. In exchange for shelling out as little as 3 percent, FHA buyers pay an up-front insurance premium equal to 1.75 percent of the loan and 0.85 percent annually.

FHA loans made up 22 percent of all mortgages for single-family home purchases in fiscal 2016, up from 17.8 percent in fiscal 2014 but below the 34.5 percent peak in 2010, FHA figures show. The share has climbed largely because of a reduction in the insurance premium and home price appreciati­on that has made larger down payments less feasible for some, said Matthew Mish, executive director of global credit strategy for UBS. House prices have been increasing about 5 percent a year since 2014.

At the same time, the nation’s biggest banks, burned by the housing crisis and resulting regulatory scrutiny, largely have pulled out of the FHA market as the costs and risks to serve it grew. Nonbank lenders, which face less regulation from government agencies such as the FDIC, have filled the void.

Non-banks, including Quicken Loans and Freedom Mortgage, comprised 93 percent of FHA loan volume last year, up from 40 percent in 2009, according to Inside Mortgage Finance. Meanwhile, the average credit score of an FHA borrower fell to 678 in the fourth quarter from 693 in 2013, according to FHA, below the 747 average for non-FHA borrowers. Mish said non-banks generally have looser credit requiremen­ts, and lenders have further eased standards — such as the size of a monthly mortgage payment relative to income — as median U.S. wages stagnated even as home values marched higher.

Here’s the worry: If home prices peak and then dip, homeowners who put down just 5 percent and are less creditwort­hy than their predecesso­rs will owe more on their mortgages than their homes are worth. That would increase their incentive to default, especially if they have to move for a job or face an extraordin­ary medical or other expense, Khater said. Foreclosur­es would trigger price declines that ignite more defaults in a downward spiral.

In turn, funding for the non-bank lenders from banks and hedge funds likely would dry up, and FHA loans would be harder to get, dampening the housing market and the broader economy, Mish said.

Guy Cecala, publisher of Inside Mortgage Finance, said such fears are unfounded, noting Federal Reserve officials have complained that FHA loan standards have been too rigorous.

“The non-banks are bringing a welcome change,” he said. They still must meet FHA standards, he said.

 ?? BRIAN BOHANNON/THE COURIER-JOURNAL ?? Some experts say they’re concerned that first-time homebuyers making small down payments are on the rise as the economy recovers, potentiall­y leading to a spike in defaults.
BRIAN BOHANNON/THE COURIER-JOURNAL Some experts say they’re concerned that first-time homebuyers making small down payments are on the rise as the economy recovers, potentiall­y leading to a spike in defaults.

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