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CoreLogic U.S. Housing Policy Update- September 2015

Mortgage Credit Trends, Housing Regulatory and Legislative Environment

Faith Schwartz    |    Housing Policy, Videos

 

Today we are here to talk about three different areas impacting the U.S. mortgage market with regard to liquidity and advancement in the housing and mortgage space. This discussion will explore the impact of the end investors, shifting credit profile, government programs, regulations and current credit accessibility for borrowers across the credit spectrum.

First, it is important to recognize where the mortgage market stands today compared to years past. As of the first quarter of 2015, Fannie Mae, Freddie Mac, commonly referred to as the GSEs, and the Federal Housing Administration and Veteran’s Administration backed over 70 percent of first lien originations. Meanwhile, the private label securitization market remains lackluster, having declined from its 41 percent market share peak in 2006 to less than one percent over the past seven years. This is a reset of the investor mortgage market and flow of private capital into housing. Meanwhile, balance sheet lending or loans held by banks has grown to 28 percent as of the first quarter of 2015.

Overall, the U.S. government continues to be a dominant player in the residential mortgage market and we anticipate this to be the case for some time going forward. There is little Congressional momentum around comprehensive housing reform and the GSE’s and government continue to play a significant role for investors in liquidity and standard setting for the 30 year mortgage.

Housing and Urban Development’s FHA program, the VA and USDA rural programs have surged and filled a void for low down payment loans.

While there is much focus and activity around how to attract private label securitization so it may regain its footing, incentives for risk taking have been greatly diminished in the post crisis era. Under a host of new rules driven by the Dodd Frank legislation, the mortgage market has many new processes from origination through securitization and loan servicing.

So how has this impacted borrowers and what else has changed?

We have seen tremendous regulatory and enforcement challenges in the mortgage industry but that is starting to slow down. We now have a good sense of many of the new rules and more clarity around how industry operators can best stay within the regulatory constructs.

But to fully serve the marketplace of eligible borrowers, we need to assess the breadth of origination and servicing processes for transparency and effectiveness to meet the demands of the housing finance system. Are we serving the full spectrum of borrowers in the system who desire a loan and who have the capacity and ability to repay? Do we have the right programs, and educational tools to meet the generational demands of borrowing we will see from the millennial population?

What do we know today?: The current credit profile of borrowers receiving mortgages for purchase transactions is much stronger than it has been in years past. This has heightened the dialogue around accessibility for consumers. Not surprisingly, since the downturn, there has been tightening on the lower end of the credit spectrum. In 2003 borrowers with a credit score below 639 comprised 18 percent of purchase transactions which increased to 30 percent in 2007. Today the current combined number of purchase transactions is below 4 percent.

But credit profile alone is not the only contributing factor to access. Most loans are now originated with full documentation. The reduction of risk layering has contributed greatly to the contraction of loans being originated in housing with the elimination of the “no and low doc loans, which peaked in 2005 at nearly 42 percent of those purchase originations currently make up less than one percent.

Per our chief economist, Frank Nothaft, existing home inventory supply constraints, limited affordable new construction, tight rental markets and stagnant increases to real incomes over the previous decade all heighten barriers of access.

Finally, the third key issue is the complex overlay of the Dodd-Frank Wall Street Reform and Consumer Protection Act which had it’s five year anniversary earlier in 2015. A host of new rules have been implemented by the newly created CFPB with the intent of advancing consumer protections to ensure that borrowers who are willing, capable and properly underwritten can attain a mortgage and eventual home ownership.

Thus far an expansive resurgence in private participation in credit risk exposure remains to be seen. GSE temporary exemptions from ATR/QM underwriting standards, varying degrees of capital standards, applied to private versus government entities and a protracted litigation environment continue to drive the dialogue in Washington on issues related to housing policy.

That said, housing is on the mend .We are seeing growth in the CoreLogic national Home Price Index (HPI) year over year. In addition we have seen a significant decline in foreclosures and delinquencies coupled with an extended low mortgage rate environment. With Government programs dominating the role of guarantor, the private market will continue to be challenged to compete with the leverage of the United States Government. In the meantime, the industry, government and non-profits and industry trade associations need to work together closely to achieve the aligned goals that meet the changing supply and demand needs of all eligible borrowers.

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