First-time homebuyers key to opening access to credit

And why setting a homeownership rate goal doesn’t make sense

Access to credit remains tight not only compared to the housing boom years but also compared to historical levels.

At the Mortgage Bankers Association Secondary conference in New York City, panelists at the Access to Credit session discussed how to safely open the credit box, and what some of the current hindrances are.

Panelists explained that the key to expanding access to credit is focusing on first-time homebuyers. Currently, the homeownership rate among younger families is not only below 2007 levels but also below the 2001 to 2006 levels, according to Tian Liu, Genworth Mortgage Insurance chief economist.

The Urban Institute Director Laurie Goodman explained there are several things that can be done to expand access to credit including making due diligence timelines more flexible, using alternative credit, less rigid rules for measuring income and allowing for more borrowers with a less stable job history such as those who work in the gig economy.

Goodman also agreed more focus should be placed on first-time homebuyers, saying many times they have a spotless record when it comes to paying their cell phones and rent, but they do not yet have a credit score.

“First-time homebuyers play unique role in housing market,” Liu said, pointing out that they typically have a less established income, and are less likely to have a 20% down payment.

“They face more hardships in becoming homeowners,” he said. “If you want to increase credit access, you need to start at first-time homebuyers.”

Many lenders have seen growth in low-down payment programs including Home Possible and Home Ready from Fannie Mae and Freddie Mac, which allow borrowers to place just 3% down.

And lenders can expand on these programs by utilizing down payment assistance programs and giving grants to supplement 97% loan-to-value ratio loans, said Deborah Jones, Citizens Bank senior vice president of capital markets. She added that homebuyer counseling is a good way to offset loss mitigation costs.

Compared to historic averages, Liu said today’s market is missing about 3 million first-time homebuyers each year. This is despite the high demand, which is likely to remain strong over the next several years.

But even as demand increases, available housing supply continues to cause constraints. New home construction may be providing supply, but it is becoming less affordable. Over the past several years, construction on new homes in the $400,000 to $500,000 range increased by 500%, while construction for new homes priced under $250,000 has remained relatively the same.

Overall, the market is currently producing about 400,000 fewer homes per year than household formations, Goodman said, saying supply issues are harder to solve since it is so deeply rooted in zoning laws.

One possible solution to the supply crisis is manufactured homes. Before the housing crisis, dating back to 1977, the U.S. produced about 240,000 manufactured homes per year, Goodman said. Now, however, that number has dropped to just about 93,000 per year.

Mortgage performance is significantly better than what the market has experienced historically, meaning lenders have significant space to expand their credit box.

So what is the end goal? What homeownership percentage do the experts say would be a good goal? As it turns out, there is no goal, and according to the panelists, there shouldn’t be.

“I don’t think there’s any necessary homeownership rate,” Goodman said. “I don’t think we should be aiming for anything.”

She said that lenders should try to help as many people as they can own a home, as long as homeownership makes sense for them. “There are so many factors at work, there shouldn’t be a goal behind it,” she said.

And David Dworkin, National Housing Conference President and CEO, agreed, saying the 70% homeownership rate hit in 2007 wasn’t the problem, it was how the market got to that rate.

“There is no limit, the limit is really around what the market is,” Dworkin said. “If we can get there responsibly, we can get to that place.”

Goodman suggested there is a better question lenders should be asking: what is the probability of default the mortgage industry should be willing to accept on a mortgage? The answer, however, is that at this point, no one knows.

“We have credit that’s a little too tight right now, but as a society we should be able to accept a little bit higher probability of default and a little higher default rates,” she said.

Currently, the probability of default sits at about 6%, about half of the 2000 level of 12%.

There are risks to expanding access to credit, however the current credit box is closed tight enough that lenders still have room to work with.

When you loosen credit standards there’s the likelihood that you not only increase product risk but also borrower risk,” Liu said. “But despite these challenges, we want to expand mortgage credit.”

And other panelists agreed.

"I agree with being careful about how we loosen credit, but there are plenty of changes that can be made,” Jones said.

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