HOUSINGNEWS REPORT
RECESSION FEARS RISING: HOW HOUSING WILL HOLD UP
AVERAGE U.S. HOMEOWNERSHIP TENURE (YEARS)
ratios above 50 percent was at an all-time high in FY 2017, with over 20 percent of borrowers with FHA-insured purchase mortgages having a DTI ratio at or greater than 50 percent. The percentage of borrowers with DTI ratios greater than 43 percent rose to 49.1 percent in FY 2017 from 43.4 percent in FY 2016.” A job loss or reduced income can start a cascade of unpaid mortgage bills. For those with little financial breathing room and minimum reserves the odds of delinquency are high with big DTI ratios, however higher down payments and tough, often manual, underwriting can offset much of the potential risk. Taking Action Bruce Norris says that in 2006 his firm “saw that recession coming; we knew it would be devastating to real estate prices. We sold our properties and told other California investors it would be wise to do the same.” With a potential recession now on the horizon, California-based Norris says that “no such fear exists. We do not feel real estate prices will take a huge hit for three reasons.” First, says Norris, “for the last eight years, buyers have had to really qualify for any loans obtained. We don’t have any crazy loan programs. The buyers got fixed rate loans about 98 percent of the time.” Second, “prices in California have over doubled since 2008. During a boom time, owners typically use home equity lines to extract equity and either invest or buy toys. They did not do that this
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
DTI Ratios . Interest rates are a part of the affordability problem but not all of it. Non-housing debt has increased substantially in recent years, constricting the ability of borrowers to qualify for financing. According to the Federal Reserve Bank of New York, student debt has gone from $260 billion in 2004 to $1.41 trillion in the first quarter of 2018. Auto debt during the same period rose from $720 billion to $1.23 trillion. Mortgage debt, in contrast, has actually declined from $9.99 trillion in 2008 to $9.38 trillion in the second quarter. Not only is mortgage debt down, the cost to service such borrowing has declined substantially. Figures from Freddie Mac show that the overall annual mortgage rate in 2008 was 6.03 percent versus 3.99 percent in 2017. To resolve the debt issue, a number of new loan programs allowing debt-to- income (DTI) ratios above 43 percent have begun to appear. For instance,
Fannie Mae and Freddie Mac now purchase selected mortgages with DTIs of up to 50 percent.
Do higher DTI programs represent more risk?
The absolute answer is “yes” and that will be the headline. Likely unmentioned is that the new loans will be both exotic and rare. According to the Urban Institute (UI), borrowers will need at least 20 percent down to get such financing. UI predicts that only 85,000 high DTI mortgages will be issued of out the 17 million loans Fannie Mae holds in portfolio, about 0.5 percent. There’s no doubt that when higher DTIs are available they will be used. In its 2017 report to Congress, HUD explained that “the average Debt-to- Income (DTI) ratio for borrowers with FHA-insured purchase mortgages continues to rise, with an average DTI ratio of 41.9 percent in FY 2017. The proportion of borrowers with DTI
7
AUG 2018 | ATTOM DATA SOLUTIONS
Made with FlippingBook Online newsletter