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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

Monday Morning Cup of Coffee: Risky home lending really on the comeback?

Yes, subprime is back, wait, no it’s not

February 8, 2016

Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on bigger issues.

First off, congratulations to the champions of the Super Bowl: The Denver Broncos!

Mortgages also received plenty of attention this weekend, and not just during Super Bowl commercial breaks, with reports offering divided view of the markets, according to the various media platforms that published the copy.

New York real estate news service, The Real Deal, examined performance of the low downpayment mortgages on offer from Fannie Mae and Freddie Mac.

Kenneth Harney writes that federal regulators want to see more of these affordably mortgages being written, so why aren’t more closing?

Well, besides the charge that the loans cost too much, there is the strict underwriting that also serves as a problem:

The average score for conventional loans closed in December was 754, just one point lower than in December 2014. Conventional mortgages are those eligible for sale to the two giant mortgage investors, Fannie Mae and Freddie Mac. FICO scores run from 300 (abysmal) to 850 (pristine.) Average scores at the government’s main mortgage source for young and minority first-time buyers — the Federal Housing Administration (FHA) — actually rose to 688 in December, seven points higher than they were the same month the year earlier. That looks like a tightening of the lid, not an opening.

To put this into context: The average FICO score for Americans is just 695. Young, prospective first-time buyers — millennials in their 20s and early 30’s — tend to have lower scores on average than other age groups. According to a report from FICO last year, nearly 53% of millennials have scores below 670. Just 25% of them score between 670 and 739. No wonder first time buyers are missing in action, accounting for just 30% of all home purchases instead of the historical norm of around 40%.

At the Los Angeles Times, the story is different. Easy mortgages are flowing, from some way-to-familiar faces.

James Rufus Koren warns:

So-called nonbank lenders are again dominating a riskier corner of the housing market — this time, loans insured by the Federal Housing Administration, aimed at first-time and bad-credit buyers.

Such lenders now control 64% of the market for FHA and similar Veterans Affairs loans, compared with 18% in 2010.

Koren then names a few of the nonbanks that are offering said mortgages.

He also adds some non-profit concerns, then adds this data as food-for-thought:

A Los Angeles Times analysis of federal-loan data shows that FHA mortgages from nonbank lenders are seeing more delinquencies than similar loans from banks. Just 0.9% of FHA-insured loans issued by banks from October 2013 to September 2015 were seriously delinquent compared 1.1% of nonbank loans. Put another way, nonbank FHA and VA loans are about 23% more likely to go bad than those issued by banks.

However, ultimately he’s left to conclude that, in fact, these nonbanks are giving honest Americans a shot at homeownership, something big banks simply aren’t doing as much these days.

As for the mortgages being offered? “For now, those options look relatively safe,” Koren concludes.

Here's another, more alarming column on these easy mortgages that bear similarities to the same loans that took down the entire national column.

At the OC Register, Jeff Lazerson opens with this gem: Steroid mortgages to buy those big boy properties through a lot of leverage and a menu of other exotic mortgages for hard to finance borrowers are back.

Lazerson is referring to a front-page piece in the Wall Street Journal: Crisis-era mortgage makes a comeback.

In his column, Lazerson argues that the interest on these Alt-A loans ultimately make them unattractive for borrowers in Orange County.

Further, the Wall Street Journal coverage goes to lengths to express the limits of origination, hardly a “comeback.”

Some lenders remain reluctant to jump in. Quicken Loans Inc., the second-largest consumer lender in the U.S. by mortgage volume, considered getting into Alt-A mortgages but decided against it because of the regulatory environment, said Bob Walters, the company’s chief economist.

Lazerson goes a step further to back this up by applauding the Consumer Financial Protection Bureau:

The CFPB’s added hammer was and is that if your lender gives you a loan that doesn’t fall into the safe-harbor category known as a qualified mortgage, you better document the heck out of why you gave the borrower that loan anyway.

And, if you can’t justify the borrower’s ability to afford this, the borrower will be able to rescind the loan up to three years later.

So what kind of mortgage should a borrower get? 

Go with a nonbank? Subprime or Alt-A?

Don't panic, it's not that bad yet. Time.com is running this primer on fixed-rate versus adjustable mortgages for some guidance.

And if there's one thing to find comfort in: the Federal Deposit Insurance Corp did not close any banks this week.

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