Com­pli­ance & Reg­u­la­tion

De­spite re­crim­i­na­tions about how the cri­sis and en­su­ing reg­u­la­tions have tight­ened loan ac­cess, an ac­tual as­sess­ment of mort­gage credit avail­abil­ity finds the sit­u­a­tion is more com­pli­cated.

National Mortgage News - - Contents - By Kate Berry

Mort­gage credit still in a post-cri­sis funk? The data begs to dif­fer

In all of the re­cent 10-year com­mem­o­ra­tions of the fi­nan­cial cri­sis, a com­mon theme has emerged among an­a­lysts and com­men­ta­tors: Mort­gage credit is just too tight.

Lenders point to the ef­fects of reg­u­la­tion that they say is over­bur­den­ing lenders and lead­ing to some bor­row­ers los­ing out on home­own­er­ship. Oth­ers say the mem­ory of mort­gage lenders done in by easy-credit poli­cies dur­ing the boom is still vivid, lead­ing to to­day’s lenders re­main­ing cau­tious.

But an ac­tual as­sess­ment of mort­gage credit avail­abil­ity is more com­pli­cated. The con­ven­tional wis­dom that the cri­sis and en­su­ing reg­u­la­tions have kept mort­gage credit out of reach for the vast ma­jor­ity of bor­row­ers is not backed up by the data.

“There are loans for al­most ev­ery bor­rower in the mar­ket­place if they want one,” said Christy Bunce, the chief op­er­at­ing of­fi­cer at New Amer­i­can Fund­ing, a lender based in Tustin, Calif.

Al­though credit def­i­nitely tight­ened in the im­me­di­ate af­ter­math of the cri­sis, sev­eral data points show it has loos­ened con­sid­er­ably in the years since, and lenders on the ground por­tray a mort­gage credit mar­ket with a di­verse ar­ray of prod­ucts for bor­row­ers of vary­ing fi­nan­cial back­grounds.

New reg­u­la­tions, such as un­der­writ­ing re­quire­ments es­tab­lished by the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau, have prob­a­bly made it harder to lend to bor­row­ers with poor credit, but not im­pos­si­ble. And an­a­lysts say that while the af­ford­abil­ity gap has got­ten worse, that may be due to sky­rock­et­ing home prices more than any­thing else.

Data points to mort­gage credit avail­abil­ity hav­ing taken a huge leap since 2012, in part be­cause of ac­cess to low­down-pay­ment loans.

“If you look from 2012 to to­day, credit has got­ten looser, par­tic­u­larly with re­spect to greater avail­abil­ity of low-down pay­ment loans,” said Mike Fratan­toni, chief econ­o­mist and a se­nior vice pres­i­dent at the Mort­gage Bankers As­so­ci­a­tion.

Still, ex­perts agree that fol­low­ing years of bal­loon­ing teaser rates and stated-in­come loans lead­ing up to the 2008 melt­down, mort­gage credit will likely never be as loose as it was back then — and that is a good thing.

“No­body wants to get back into the mess that every­body was in dur­ing the melt­down,” said Bunce, a for­mer vice pres­i­dent of un­der­writ­ing at Coun­try­wide Fi­nan­cial, which was sold to Bank of Amer­ica in 2008. “We don’t want stated-in­come loans back or those kind of ex­otic loan pro­grams. The credit box is pretty much where it should be.”

Just by orig­i­na­tion vol­ume alone, mort­gage lend­ing has made a dra­matic re­cov­ery since the cri­sis.

In 2005, dur­ing the real es­tate boom, home pur­chase loans reached $1.5 tril­lion, ac­cord­ing to data by the Mort­gage Bankers As­so­ci­a­tion. The mar­ket be­gan to crater in 2008, bot­tom­ing out in 2011 at $505 bil­lion, but then be­gan a dra­matic re­cov­ery in 2013. By last year, the vol­ume of pur­chase loans hit $1.1 tril­lion, the same level reached in 2007.

“It’s the loos­est credit since 2007, but nowhere near 2005 or 2006, which was un­healthy,” said Lionel Ur­ban, a vice pres­i­dent and prod­uct man­ager for bank so­lu­tions at Fis­erv, a tech­nol­ogy provider. “There’s tons of liq­uid­ity in the con­form­ing space and that’s where every­body is com­pet­ing, and they are com­pet­ing hard now be­cause vol­ume and mar­gins are com­press­ing.”

The FHA’s guide­lines re­mained un­changed dur­ing and af­ter the cri­sis, with bor­row­ers able to ob­tain a home loan with only 3.5% down.

Other data sug­gests that mort­gage credit ac­cess may never get back to where it was at the height of the boom, but has still made a sharp re­bound since the af­ter­math of 2008.

The MBA tracks ac­cess to mort­gage prod­ucts with an in­dex mea­sur­ing the over­all sup­ply of credit based on a wide range of prod­ucts that in­vestors are will­ing to buy. The “mort­gage credit avail­abil­ity in­dex” suf­fered a sharp down­turn from 868.7 in June 2006 to 92.6 in June 2011. But the in­dex came back to 181 in June of this year, re­flect­ing a loos­en­ing of down pay­ment and credit score re­quire­ments since 2012.

“Yes, we’ve seen some loos­en­ing but we’re nowhere close to where we were in 2006,” said Fratan­toni of the MBA.

Oth­ers note that while in­dus­try prac­tices and reg­u­la­tory de­crees have forced lenders to sig­nif­i­cantly bol­ster doc­u­men­ta­tion, cor­re­spond­ing im­prove­ments in tech­nol­ogy have al­lowed com­pa­nies to make those changes and still make credit avail­able.

“Rel­a­tive to the last hous­ing boom, it’s hard to get a loan, but it’s prob­a­bly much eas­ier rel­a­tive to long-term norms since you have to pro­vide the same doc­u­men­ta­tion but now there are ways you can do it more quickly with tech­nol­ogy,” said Daren Blomquist, a se­nior vice pres­i­dent at At­tom Data So­lu­tions.

Ev­i­dence of the grad­ual loos­en­ing of credit over the past few years can be found in the slight uptick in fore­clo­sure start num­bers to 1.26% in vin­tage 2014 Fed­eral Hous­ing Ad­min­is­tra­tion loans, Blomquist said, com­pared with the longterm av­er­age of 0.7%.

“It’s a sign that a mod­icum of risk has re­turned to lend­ing,” he said.

For less cred­it­wor­thy bor­row­ers and those with hard-to- doc­u­ment credit pro­files, there is no sub­prime or Alt-A mar­ket any­more. But there are more than 200 down pay­ment as­sis­tance pro­grams that al­low low- and mod­er­ate-in­come bor­row­ers to get into a home pro­vided they have de­cent credit.

Data shows that a range of fac­tors, from down pay­ments to loan-to-value ra­tios to debt-to-in­come ra­tios, have all loos­ened dra­mat­i­cally since the cri­sis.

In 2017, the me­dian down pay­ment for a pur­chase loan was 6.5%, up from an av­er­age of 4.5% per­cent in 2007, ac­cord­ing to At­tom Data So­lu­tions.

The FHA’s guide­lines re­mained un­changed dur­ing and af­ter the cri­sis, with bor­row­ers able to ob­tain a home loan with only 3.5% down.

Both Fan­nie Mae and Fred­die Mac cur­rently of­fer low-down-pay­ment pro­grams that re­quire as lit­tle as 3% down.

In a hand­ful of states with high home prices — in­clud­ing Cal­i­for­nia, Colorado, Hawaii, Ore­gon, Mas­sachusetts, New Jer­sey and New York — some lenders re­quired a me­dian down pay­ment of 10% in 2017.

Mean­while, in the first half of 2018, 11% of pur­chase loans had LTV ra­tios of 95% or higher, a ten­fold in­crease from 2014, when a mere 1.2% of pur­chase mort­gage loans were orig­i­nated with LTVs of 95% or more.

To be sure, the reg­u­la­tory en­vi­ron­ment has made as­pects of mort­gage orig­i­na­tion more chal­leng­ing, and the in­dus­try con­tin­ues to push for changes to the CFPB’s “Qual­i­fied Mort­gage” rule and other reg­u­la­tions.

Bill Dal­las, whose for­mer com­pany Ownit Mort­gage So­lu­tions be­came the first high-pro­file mort­gage lender to close dur­ing the cri­sis in 2007, said reg­u­la­tions such as the CFPB re­quire­ments are keep­ing some self-em­ployed bor­row­ers, small busi­ness own­ers and bor­row­ers with as­sets but no in­come, from get­ting a loan.

“We turn down po­ten­tial bor­row­ers all the time,” said Dal­las, now the pres­i­dent of Fi­nance of Amer­ica Mort­gage. Yet “from an over­all credit per­spec­tive, credit is not tight,” he added.

“The in­come guide­lines are re­stric­tive. So credit is avail­able but get­ting peo­ple to fit that box is dif­fi­cult be­cause the un­der­writ­ing rules re­strict in­come and as­sets,” Dal­las said.

Un­der the Qual­i­fied Mort­gage rule, lenders must doc­u­ment a bor­rower’s in­come, as­sets, sav­ings and debt us­ing eight cri­te­ria known as Ap­pen­dix Q, which the in­dus­try wants changed.

Don White, the chief credit of­fi­cer at Pen­nyMac, said doc­u­men­ta­tion of self-em­ployed in­come in the QM rule “is par­tic­u­larly oner­ous, es­pe­cially for small busi­nesses.”

But the im­pact of the QM rule on mort­gage credit avail­abil­ity is also lim­ited. Tech­ni­cally, the QM stamp of ap­proval re­quires that a bor­rower must have a debtto-in­come ra­tio of 43% or less. Lenders have com­plained loudly that that cut­off has dis­pro­por­tion­ately im­pacted low- to mod­er­ate-in­come bor­row­ers. How­ever, the CFPB rules carve out a seven-year ex­emp­tion for loans backed by Fan­nie and Fred­die, which ex­pires in 2021.

Fan­nie and Fred­die “have their QM ‘patch,’ and they don’t have to abide cur­rently by Ap­pen­dix Q re­quire­ments in or­der to be QM,” said White.

And many agree that the CFPB rules are still in flux, and the bu­reau could make changes to QM that will pro­vide more flex­i­bil­ity to lenders. Act­ing CFPB Direc­tor Mick Mul­vaney — a Trump ad­min­is­tra­tion ap­pointee fo­cused on eas­ing rules de­vel­oped in the Obama ad­min­is­tra­tion — has shown a will­ing­ness to re­vise QM. But even for­mer CFPB of­fi­cials un­der Mul­vaney’s pre­de­ces­sor, Richard Cor­dray, are open to some changes.

“Ap­pen­dix Q could be tweaked to al­low a bor­rower to qual­ify if their as­sets sup­port the monthly mort­gage pay­ment,” said Pa­tri­cia McCoy, a law pro­fes­sor at Bos­ton Col­lege Law School and a for­mer as­sis­tant direc­tor for mort­gage mar­kets at the CFPB.

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