HOUSINGNEWS REPORT
THE RETURN OF RISK: SUBPRIME SNEAKING BACK
U.S. HOME AFFORDABILITY TRENDS
PCT OF ANNUALIZED WAGES TO BUY MEDIAN-PRICED HOME
AFFORDABILITY INDEX
180
50.0%
45.0%
160
40.0%
140
35.0%
120
30.0%
100
25.5%
80
20.0%
60
15.0%
40
10.0%
20
5.0%
0.0%
0
That 31.2 percent of average wages needed to purchase a median-priced home in the second quarter of 2018 is the highest in nearly 10 years since Q4 2008, when the share of income needed to buy was 34.3 percent. What was previously known as subprime is now increasingly branded as nonprime to differentiate it from past loan offerings. But whatever it’s called, why is subprime returning? Isn’t the economy doing well with little unemployment and strong numbers on Wall Street? If subprime is back, will we see the return of the old shortcuts and abuses? Or something different? In just 10 years the housing market has gone from bust to boom, a transition of massive proportions. Home prices are rising just about everywhere, inventory is in short supply, and multiple offers are as common as crabgrass. Most Americans believe the good news will continue.
Gallup reported in May that 64 percent of Americans expect local home prices to be higher a year from now. “That is up nine percentage points in the past two years,” said the polling company, “and is the highest Gallup has measured since the emergence of the housing bubble in the mid-2000s.” Yet despite such public expressions of confidence, the reality is that many potential borrowers can’t crack the application code. The Qualified Mortgage (QM) standards can be tough and inflexible, especially for borrowers with stalled incomes and mounting debts. There are few places for them to turn. As Mike Fratantoni, chief economist with the Mortgage Bankers Association, explains, 98 to 99 percent of all loans now originated are QMs. It doesn’t have to be this way. Not only are there QM loans, lenders are also allowed to originate non-QM
financing such as jumbo mortgages and nonprime financing. Nonprime loans provide a path to mortgage financing for borrowers hobbled with low credit scores, debt issues and other concerns, but whom some lenders consider to still be good mortgage risks. Are Credit Standards Too Tight? The typical credit score for a closed loan was 723 in April 2018 according to Ellie Mae, down from 745 in April 2012. In either case these are great numbers, evidence of solid credit. lending standards are just too tight. The Urban Institute (UI) found “that the number of borrowers with FICO scores above 700 shrank by 7.5 percent from 2001 to 2014; Borrowers with FICOs between 660 and 700 shrank 30 percent; and those with FICOs below 660 shrank 77 percent.” Such high numbers may also be evidence of something else, that
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JULY 2018 | ATTOM DATA SOLUTIONS
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