By Patrick Duffy
Although the housing rebound is definitely here to stay, a major source of frustration for many in our industry is the pace of sales compared with previous economic recoveries. Both housing starts and permits, which grew steadily throughout most of 2013, dipped in December versus November even as prices continued to rise; there remains plenty of pent-up demand in the marketplace. Meanwhile, builder confidence is taking a brief rest due to a combination of rising construction costs, a shortage of skilled homebuilding labor, too-low appraisals and a lending environment that continues to be skewed toward only the best candidates with near-perfect credit scores and reliable W-2 income.
In fact, the lending problem has become acute enough that the Mortgage Bankers Association recently revised their 2014 forecast downwards due to “a combination of rising rates and regulatory implementation, specifically the new Qualified Mortgage Rule.” The new forecast predicts annual refinancings this year to be down 60 percent from 2013 (largely due to higher interest rates) but purchase originations still rose by 3.8 percent. During the fourth quarter of 2013, the mortgage businesses for Wells Fargo and JPMorgan Chase were reportedly down by 60 and 55 percent from a year ago, respectively.
For adjustable rate loans, underwriters now must take into consideration the potential maximum rate and payment amount over the life of the loan instead of approving based on the teaser rate alone. This would seem to disproportionately impact younger buyers who were previously willing to take a gamble that their paychecks would improve along with their careers, thus making higher monthly payments in the future feasible.
Also, now largely shut out of the mortgage market are the newly self-employed, as evidenced by nationally syndicated housing columnist Lew Sichelman’s disappointing experience to refinance a rental property despite a credit score of 760 and an LTV of 70 percent. With less than two years of history of 1099 income, Lew’s equity in several other properties simply wasn’t relevant under today’s underwriting criteria. For now, Sichelman would have to make due with an interest-only loan, which has begun to be offered again by some banks to their savviest customers.
There may, however, be signs of a thaw in this somewhat frozen market. Many eyes are now on former congressman Melvin L. Watt as director of the Federal Housing Finance Agency, which oversees both Fannie Mae and Freddie Mac. As opposed to Edward DeMarco, the agency’s acting director for the past four years, Mr. Watt has already indicated a clear shift in direction which includes delaying a series of higher loan fees announced in December and putting access to mortgage credit front and center ahead of other goals, especially that of scaling back the federal governments role in propping up the residential mortgage market.
What this means in the short run is that those buyers without perfect credit and large down payments will not face higher upfront loan fees charged by Fannie and Freddie. In the long run, there remains a larger policy disagreement on the role of private capital in our nation’s mortgage market, one that would be completely separate without any connection to government. And yet in a lending environment of mortgage rates below five percent, private capital has stayed on the sidelines because there are too many other competing options that offer higher yields. Add in the considerable interest rate risk that an investor takes with a traditional 30-year fixed-rate loan and it’s not surprising that lenders continue to be picky. Eventually, however, lenders which rode the now-declining refinancing wave of 2013 will have to make up that lost business with new loan originations.
To spur lending, three things should happen. Firstly, Fannie and Freddie will have to expand the range of mortgages they guarantee without lowering standards. Secondly, the re-emergence of private capital should occur before government fees are raised. And thirdly, Mr. Watt should ensure that the 30-year fixed-rate loan remains a bedrock of housing finance given its historic role as the best way for homeowners to slowly build wealth without worrying about future interest rate shocks.
Patrick Duffy is a Principal with MetroIntelligence Real Estate and Economics Advisors. He can be reached firstname.lastname@example.org or at 310-666-8288.