Finance is now suffering from tighter credit availability, and that may be what finally turns this ship around.
By Genevieve Smith
As the housing industry becomes widely recognized as near full recovery, some serious questions about credit availability arise. In an article confirming that it’s harder to get a mortgage today than it was before the crisis, the Housing and Housing Finance researchers at the Urban Institute point out that borrowers with less than perfect credit are increasingly opting to not even bother applying for a mortgage at all. Not good news for those trying to sell houses, especially when they know their target consumer wants what they’re selling.
The article further notes that the mortgage market operated under reasonable standards in 2001, and, based on the standards from that year for comparison, “the increased reluctance to lend to borrowers with less-than-perfect credit killed about 6.3 million mortgages between 2009 and 2015.” That means 6.3 million dead sales for homebuilders, extrapolated to the dead sales that would have been generated for product manufacturers and jobs for trades in a building industry that was struggling through and then recovering from a recession. Suffice it to say that’s too large a number of missed opportunities: too many builders and product manufacturers missing out on sales, too many trades out of work, and too many families missing out on the American dream of home ownership.
Finance is now suffering from this tighter credit availability, and that may be what finally turns this ship around. In the May 2017 edition of At A Glance, the Housing Finance Policy Center at the Urban Institute showed that profitability is down, with originator profitability at its lowest level since 2016.
In the report, data distilled from CoreLogic, eMBS, HMDA, SIFMA, and Urban Institute on owner-occupied purchase loans assessed the median credit score for new originations as up 27 points from a decade ago at 727 (and even higher in MSA’s with high housing prices), and puts the lower end of creditworthiness at 645 as of this February, whereas it stood steady in the low 600s before the recession.
Origination volume for calendar year 2016 was close to $20 trillion. In 2017, Fannie Mae, Freddie Mac, and MBA expect origination volume to be in the $1.5 to $1.6 trillion range – a loss of $18.4 to $18.5 trillion – owing to sharp decline in refinance activity due to rising interest rates. The 2017 share of refinancing is expected to be in the 27 to 32 percent range, representing a drop from the 48 percent refinance share in 2016, according to the Urban Institute’s report.
Indeed, a slowdown in refinancing pulled down the total mortgage application volume in February when refinance volume hit its lowest level since June 2009, when changes to certain government-loan programs made refinances less lucrative. So, finance is starting to feel the pinch of tight credit and they surely won’t just sit back and let that happen.
It’s important to note the change in mortgage rates this year. Average mortgage rates from 2014, 2015, and 2016 were 3.6 percent, 3.7 percent, and 3.6 percent respectively. Respective average projections for 2017 from Fannie Mae, Freddie Mac, and MBA are 4.1 percent, 4.4 percent, and 4.3 percent.
However, they’re still near historically-record lows and it may be the push needed to open up credit. In the same report, the Housing Credit Availability Index (HCAI) – a calculation that represents the share of owner-occupied purchase loans that are likely to default – shows that credit availability remained flat at 5.2 percent in the fourth quarter of 2016 (Q4 2016). The measure is less than half of the 2001-2003 standard of 12.5 percent. The good news here is that the HCAI is likely to increase with the post-election spike in interest rates, as leaders may expand the credit box when origination volumes drop.
From the report: “When originator profiles are higher, mortgage volumes are less responsive to changes in interest rates because originators are at capacity. Originator profitability and unmeasured costs (OPUC), formulated and calculated by the Fed, is a good relative measure of originator profitability…Driven by the post-Brexit decline in interest rates, OPUC rose sharply to $3.21 [per $100 loan] in July 2016. Since then, it has declined to $2.29 in April 2017, the lowest level since January 2016.”
So, with profitability down, the upward fluctuation in interest rates may be enough to loosen up some purse strings, finally.
Other key findings in the report include first-time homebuyer share of GSE purchase loans reached the highest level in about six years, delinquencies declined in Q1, and government insurance edged out private mortgage insurance.
Even though April sales are down about a percent (1.3), with herds of qualified buyers discouraged by competitive, low-supply markets, there are others already coming out of the woodwork to up-bid what home are available, and pretty much as soon as they hit the market. And if the Urban Institute is right about credit loosening up, prepare for more.
You better get building. If supply can start to meet demand, it’s looking good for summer sales.
Genevieve Smith is the Senior Editor at Builder and Developer magazine. She may be reached at firstname.lastname@example.org.