Market Watch – Cutting down-payment requirements and helping owners to quickly build home equity with cheap loans are a couple of ways that the mortgage industry is looking to boost the housing market in 2015.
The year ending this week was a tough one for housing: Sales of existing homes are expected to finish 2014 about 3% down from 2013, and sales rates for new single-family homes are below year-earlier levels. But activity could pick up in 2015: The share of home-mortgage originations that goes to home purchasers is expected to rise as credit access ticks up and refinancing applications continue to shrink.
Total mortgage originations, which may see only minimal growth in 2015, have been constrained by rules created in the wake of the financial meltdown that aimed to protect homeowners, as well as by the broader housing industry and economy. Lenders, worried about the financial and legal risks attached to making loans, maintained strict standards in 2014. And a shaky economy has sidelined prospective buyers.
More than five years into the recovery from the Great Recession, now that the labor market is heating up, some economists say it’s time to help more prospective homeowners obtain credit and deepen the pool of applicants who qualify for mortgages. Lenders and regulators are trying to just do that with programs that may nudge up purchase-mortgage origination’s in 2015.
One such program is the Wealth Building Home Loan, developed by the Neighborhood Assistance Corporation of America (NACA), a housing-counseling agency, and the American Enterprise Institute, a conservative Washington, D.C.-based think tank, that aims to help low- and moderate-income borrowers get a mortgage and quickly build equity. Bank of America BAC, and Citigroup have agreed to participate in the program, which is designed to get relatively cheap 15-year mortgages to borrowers, helped by a lender subsidy. A pilot started earlier in 2014, and the loans should be available in every state in 2015, said Bruce Marks, NACA’s chief executive.
“You’re really making mortgages affordable for low- and moderate-income people,” Marks said. “This is a better credit risk for the banks.”
Another program that could lead to an incremental increase in 2015 for purchase mortgages is an initiative announced in October enabling federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back loans with down payments as low as 3%. While there’s been substantial hand-wringing over whether these low-down-payment loans are too risky, proponents say they can be safely made as long as a borrower’s credit score is strong.
“Ninety-seven percent loan-to-value loans can be made prudently—that’s a plus for homeowners and for taxpayers,” said Mark Zandi, chief economist of Moody’s Analytics.
Experts don’t expect a rush of borrowers for these loans, given that even down payments as low as 3% could still be a major impediment to the first-time home buyers who qualify for the program.
One of the most persistent challenges to reigniting the housing market has been the strict credit standards that lenders erected in the wake of the financial meltdown. Getting walloped with massive settlements in recent years, and uncertainty about the risks attached to making mortgages, have kept lenders on guard, and borrowers’ access to credit remains far below pre-bubble levels.
“We got to this point of risk avoidance through death by a thousand cuts,” said David Stevens, president of the Mortgage Bankers Association (MBA), a Washington, D.C.-based industry group.
Regulators recently clarified when lenders would be on the hook for loans that go bad—a step that could also lead to more mortgage origination’s.
One unfortunate side effect of lenders’ wariness to make loans is the space that’s been created for bad actors.
“There is a new market emerging that we have to be very cautious about,” Stevens said. “I’ve seen some new lenders finding ways to do lower credit, worse credit-quality loans…Markets like this tend to bring out players who think they can get profit margins in places where the mainstream community isn’t willing to lend.”
But the better news is that economic trends, such as ongoing low mortgage rates and a strengthening labor market, should support home buying in 2015. And while economists don’t expect mortgage origination’s to surge in coming years, they do think that home-purchase loans will make up an increasingly large portion of new loans.
For 2014, mortgage origination for one-to-four-family homes are expected to total about $1.1 trillion, with purchase loans making up 57% of that sum, according to the MBA. In 2015, total origination’s could tick up to $1.2 trillion, while the share of purchase loans rises to 62%. And by 2016, purchase loans will make up 68% of $1.2 trillion in origination’s, according to the MBA.
“The story going into next year is pretty much the story we’ve seen for the past two years—underwriting by historical standards remains very tight,” said Guy Cecala, publisher of Inside Mortgage Finance, which closely monitors industry trends. “You are seeing some loosening at the margins.”
Original article published by Ruth Mantell on Market Watch.
