A full-blown housing recovery could push the nation closer to full employment, but a confluence of factors have made this an illusory goal, researchers claim in a new report from Moody’s Analytics and the Urban Institute.
As home prices rise, rates increase and investors step away from the market, the recovery becomes even more dependent on the return of move-up and first-time homebuyers, says analysts Jim Parrott and Mark Zandi, both of whom published a research paper on mortgage credit, titled “Opening the Credit Box.”
The only problem is many of these buyers are not ready to sign onto a mortgage, or they are not allowed to get a mortgage due to stringent underwriting guidelines.
Parrott and Zandi’s statistics show first-time homebuyers struggling as affordability disappears and tighter lending standards block them from the mortgage market altogether.
The good news is housing starts doubled from the Great Recession to current levels, rising from 500,000 units per year during the crux of it, to 900,000 units. Prices are also up 15% from two years ago, Parrott and Zandi said.
But credit remains tight, with the average credit score on purchase loans hovering at 750 – 50 points above the average credit score a decade ago.
Lenders and borrowers are caught on a type of dangerous carousel, where they are unable to break free of current market trends due to pending litigation and regulatory risk, changing market dynamics and fears built into the system on both sides.
"First, lenders have reassessed how much risk they are willing to take on, in part because they were burned badly in the crisis and in part because they have come to recognize a range of costs associated with riskier lending not fully appreciated before: the increased cost of servicing distressed borrowers; the reputational and legal risks associated with servicing significant numbers of delinquent or defaulting loans; and a similar range of risks associated with originating loans that subsequently default, to name but a few," the two researchers noted in their report.
Lenders also were able to stay active and financially viable for years by focusing on refinancing – a market that is starting to cool, making the pivot to purchase loans essential, but difficult.
Lenders are also worried about loan putbacks – or requests from the GSEs asking lenders to repurchase loans with underwriting mistakes or issues.
"Lenders are only willing to make loans intended for purchase by Fannie or Freddie or insurance by the FHA if there is little prospect of default, so that they do not expose themselves unwittingly to the risk that they will bear the cost," the report concluded.
Parrott and Zandi say the goal is to strike a balance between access to credit and safe lending, without resorting to excessive risk-taking.
The average household receiving a Fannie/Freddie purchase mortgage had a FICO score of 766 in June. A decade ago, that score would have been 50 points lower. Current FHA borrowers have an average credit score of 700 and above, which is also 50 points higher when compared to normal market cycles.