Higher mortgage down payments may cramp homebuilder recovery
As regulators stiffen mortgage underwriting requirements, some homebuilders stand to lose more business than others. Federal regulators will release a proposal in April defining what mortgages securitizers and, by extension lenders, will be forced to maintain 5% risk retention for. Early indications are that the downpayment for these qualified residential mortgages could range from 10% to 20%. Meanwhile, lawmakers are crafting a new version of a housing finance system that would not only reduce the role of the Federal Housing Administration – which is exempt from QRM requirements – but also tighten the standards on these loans to better mitigate risk to taxpayers. Analysts expect mortgages written outside of these standards to shrink, which could be a problem for already struggling homebuilders who rely on these loans. Research released Tuesday by investment bank Keefe, Bruyette & Woods showed homebuilders varied on their reliance on FHA loans in particular. For most of these companies, FHA mortgages back just over 50% of their volume, but that goes up to as high as 65% for D.R. Horton (DHI), KB Homes (KBH) and Lennar (LEN). Less impacted companies would be the luxury builder Toll Brothers (TOL), which already touts an average 30% downpayment from its homeowners. Pulte Homes (PHM) has one-third of its mortgages backed by the FHA, and would be spared the brunt of the restriction should it come. "Recent builder results have noted a tightening in mortgage credit in the fourth quarter, primarily through more stringent documentation but in some cases higher FICO score requirements," KBW said. "This has resulted in an increase in order cancellation rates." The National Association of Homebuilders addressed these concerns to regulators this month in a joint letter with the National Association of Realtors and two consumer advocacy groups. "We realize the Administration and the regulators do not need to be told how vital the recovery of the housing market is to the fate of the nation’s economic prosperity," the groups wrote. "But we do feel obligated to tell you that, in our opinions, unnecessarily high down-payment requirements under QRM would make a near-term housing recovery almost impossible." But KBW analysts expect the companies will be forced to make adjustments, such as reducing the focus on entry-level loans, increase energy efficiency to reduce monthly homeownership costs, and target land development in less FHA-dependent markets. "While volumes are at historical lows and should trend up over time, in the future builders will have to devise operating strategies to contend with tightening mortgage credit and increasing FHA fees, down payment requirements, and reduced loan limits," KBW said. Write to Jon Prior. Follow him on Twitter @JonAPrior.