We’re soon going to help “lower wealth borrowers” by making mortgages available with just 3 percent down. That’s the word from Mel Watt, director of the Federal Housing Finance Agency.
Who are “lower wealth individuals?” Those who are not rich and famous? Individuals on welfare? It’s hard to know but the expression seems to confirm the idea suggested by George Orwell that political language is designed to “to give an appearance of solidity to pure wind.”
Seven years after the mortgage meltdown it’s apparent that scars remain. One reason a lot of households have “lower wealth” is that real estate values have yet to recover: Watt’s FHFA reports that home prices in August remained 5.8 percent lower than in 2007. Figures from RealtyTrac show that much has improved since 2012, when 12.8 million homes were “seriously” underwater. Now, 8.1 million homes are seriously underwater, an expression which means that home values are at least 25 percent lower than mortgage balances.
We’ve seen considerable improvement in many local real estate markets but the financial trench created by the go-go lending period from roughly 2000 through 2007 is so deep that more remains to be done.
The new effort to invigorate the real estate market includes not only helping “lower wealth individuals,” but also expanding something known as the “credit box,” another expression that would surely amuse Orwell, the author of “1984.”
A bigger “credit box” essentially means that we’re going to fiddle with a few mortgage standards, thus allowing borrowers who do not now qualify for financing into the game. Supporters will see this as a good thing while critics will worry that lowering mortgage standards might cause another financial meltdown.
So what changes are we talking about?
There is, first of all, the movement toward conventional loans with 3 percent down that will be bought from lenders by Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) regulated by FHFA. For many borrowers the difference between 5 percent up front and 3 percent is huge, enough to open the possibility of homeownership as a serious consideration. For an individual purchasing a $175,000 property the difference is $8,750 up front versus $5,250. Closing costs are extra.
The catch is that mortgages with little or nothing down are already widely available. For instance, EllieMae says that in September FHA loans (19 percent) and VA financing (12 percent) represented nearly a third of all originations.
While the lower down payment standard has gotten a lot of attention, it’s not really the centerpiece of the credit box expansion issue because — after all — lots of loans with little down are already out there. Instead, it’s the behind-the-scene goodies for lenders that are expected to open the mortgage floodgates.
Lenders complain — with some justice — the loan standards have become so tough that they face the possibility of being forced to buy back mortgages from Fannie Mae, Freddie Mac and the FHA for minor paperwork errors that have nothing to do with loan quality or repayment. Wells Fargo CEO John Stumpf has complained about buy-back demands for loans that were in good standing for a decade or where mortgages were in “technical default” because of minor glitch, say “John G. Stumpf” on the first page of a loan document and “John Gerard Stumpf” on the second.
2,000 Page Loan Applications
One result of lender anxiety has been the trend to document everything. According to VirPack, the typical loan application now runs more than 500 pages and it’s not usual to find files with 1,000 pages and even 2,000 pages. For instance, with Fannie Mae and Freddie Mac loans can now have two, 30-day late charges in the first three years and not set-off buy-back demands.
Another change involves “cures.” Under Wall Street Reform, lender fees and points are limited to not more than 3 percent of the loan amount for financing of $100,000 or more. But what happens if there’s a mistake and a lender charges too much? The rules are now being changed so that a lender can have as long as 210 days to refund the overage and avoid a buy-back demand.
Not everyone buys into the idea that a loosening of loan standards is either good or necessary. The New Republic says that “by taking the GSEs off the playing field in seriously enforcing lending standards, policing the mortgage market falls to the Consumer Financial Protection Bureau, which has authority under the ability-to-repay rule. CFPB simply has a much smaller staff and resources to oversee a multi-trillion-dollar market. Moreover, it was the threat to lenders’ bottom lines that kept them from falling back to old predatory habits. Only the GSEs had the ability to make that threat credible, and now they’re bugging out.”
Not to be outdone, the Urban Institute reported in August that “after combing the data for the past several months, and despite recent headlines, the Housing Finance Policy Center team has seen surprisingly little impact on the origination numbers.”
Will The Credit Box Expand?
Back in 2003 lenders originated mortgages worth $3.8 trillion. In comparison loan originations this year are expected to reach $1.1 trillion according to the Mortgage Bankers Association.
No matter how much we enlarge the “credit box” or seek out “lower wealth borrowers,” the reality is that past origination levels won’t be back for years if not decades. Here’s why:
First, large numbers of homeowners refinanced in 2012 and 2013 when rates hit historic lows. They have no need to refinance into mortgages at today’s rates.
Second, vast numbers of borrowers — those 8.1 million who are “seriously” underwater — lack the equity needed to refinance.
Third, incomes fell 8.7 percent between 1999 and 2013 according to the Bureau of Labor Statistics. This means it’s harder for borrowers to afford mortgage costs than a decade ago.
Fourth, student debt now tops $1.1 trillion, up from $260 billion in 2004, according to the New York Fed. More student debt makes it more difficult for borrowers to fit within standard debt-to-income ratios that would allow them to easily qualify for a mortgage.
Fifth, existing home sales trail 2013 activity, meaning there are fewer properties to finance.
Given this background, if lending standards are reduced are there enough “lower wealth borrowers” to bring back record origination levels? It seems very unlikely, unless we are once again willing to trash traditional underwriting requirements and accept the inevitable fall-out of more foreclosures and lower home values. No doubt George Orwell would have an expression for this, perhaps a move toward “progress in reverse.”