Still smarting from the billions of dollars in penalties they paid for the low-quality loans they made during the pre-recession housing boom of the last decade, mortgage lenders continue to turn down about one-third of potential homebuyers who apply for loans.
That, in turn, has soured some homebuilders on entry-level products, designed and priced to attract first-time homebuyers — the group least likely to qualify for mortgage loans during a years-long era of strict underwriting requirements that favor applicants with higher incomes, better credit and bigger down payments.
Caviness & Cates Communities in Fayetteville, NC, for example, at one time specialized in building homes for first-time buyers, but over the past 10 years has refocused its product on more expensive, move-up housing. That decision, the company’s co-founder Chris Cates told Construction Dive, reflects the firm’s inability to sell to newcomers who are unable to qualify for loans.
“We’ve got plenty of [potential first-time buyers] wanting to write offers,” he said, “but it’s hard to get them qualified.”
A ‘steady easing’
A new report from Fitch Ratings said that situation is changing as borrowers see “a steady easing” of high credit standards by banks and other lenders. Combined with historically low interest rates and a slowing rate of price increases for homes, the report noted, easier-to-quality-for mortgages “support a more robust 2015 for the U.S. homebuilding and construction sectors.”
A July report by the Mortgage Bankers Association agreed: “The housing market recovery has shifted to a higher gear,” according to a commentary by economists Lynn Fisher, Mike Fratantoni and Joel Kan, who revised their prior forecasts for home sales and prices to reflect their increasing optimism for the market — and for an increasing number of home loan approvals. Last month, the MBA reported that mortgage credit availability decreased in June because lending standards were still tightening.
The challenge for builders, the Fitch report said, will be to keep home prices affordable for entry-level buyers who are able to qualify for loans. “We believe the key is sustaining… growth in the face of possible erosion in affordability,” the authors wrote.
5 signs
Credit availability isn’t the only factor that can make or break home sales: A strengthening economy and pent-up demand made for a healthy spring selling season, Fitch’s leading homebuilding analyst and managing director, Robert Curran, said in a release. But it’s a big one.
Here are five emerging trends in mortgage financing that Curran and his colleagues predicted will have a positive impact on homebuying — and therefore on homebuilding — over the coming months:
1. The Federal Housing Administration this spring clarified what kind of underwriting standards the government deems acceptable for bankers to follow when approving mortgages. The move was an effort to encourage lenders, still fearful that they will incur additional government penalties if the loans they approve and sell into the secondary mortgage market — which is dominated by federally control Fannie Mae and Freddie Mac — go bad.
2. The FHA reduced private mortgage insurance premiums on its loans earlier this year, a move that the government estimated would save the average first-time mortgage borrower $900 a year.
3. The Consumer Financial Protection Bureau, a federal regulator of mortgage lenders, has ordered banks and other lenders to simplify the forms they supply to borrowers to inform them about the loan’s terms, fees and payments. Those new forms — which will be uniform from lender to lender and are designed to make it easier for borrowers to comparison shop among banks — will be required starting Oct. 3. The CFPB was created in 2011 after Congress passed the Dodd-Frank Act in response to the financial crisis that is blamed for starting the recession.
4. The organization that keeps track of FICO scores — a measurement of how reliably a borrower has paid bills in the past — has said it will create a new kind of credit score by later this year. The new score will measure payment histories not just for credit cards and loans as the traditional FICO score does, but for gas, electric, phone and cable bills. The alternative scoring system is expected to help more borrowers, especially minorities, qualify for mortgages.
5. U.S. lenders, as a whole, have eased their loan approval standards every quarter for the past four. The Federal Reserve Board’s Senior Loan Officer Opinion Survey said that has translated into more loans for mortgage borrowers seeking traditional, “prime” loans from lenders like banks — as opposed to lower-down payment loans through government programs for first-time buyers.
The Fitch economists have predicted that housing starts will expand almost 14% in 2015, new home sales will increase by 20%, and existing home sales will rise by 4%.