Higher risk borrowers are growing more bold about applying for a mortgage, however it may not do them much good.
The second quarter 2018 Mortgage Lender Sentiment Survey from Fannie Mae shows lenders reported demand growth for non-GSE eligible loans over the prior three months hit a two-year high for the same quarter.
Mortgages which are not eligible for purchase by the GSEs fall into two camps. Either the size of the loan exceeds the limit set by the GSEs, or the loan does not meet the required standards on debt-to-income, credit scores, liquid reserves and/or down payments.
“With the distribution of homes that are for sale skewed toward the more expensive end of the spectrum, it is possible that more borrowers are applying for jumbo loans,” Capital Economics Property Economist Matthew Pointon said. “However, the housing inventory has been skewed toward expensive properties for some time, so it seems unlikely that this can explain all of the recent divergence in demand.”
However, the increase in demand will do borrowers little good.
“We doubt the rise in mortgage demand from higher risk borrowers reported in the latest Fannie Mae survey will lead to a surge in mortgage lending,” Pointon said. “Cautious lenders and regulations mean that this market segment will remain small, even as more marginal borrowers find the confidence to apply for a loan.”
Fannie Mae’s survey shows the net share of lenders reporting easing remained stable, however, the net share reporting easing of credit standards for non-GSE eligible loans appeared to rise from last quarter, and net easing share for non-GSE eligible loans for the next three months reached a survey high.
Capital Economics explained as house prices increase and confidence has rises, the rise in demand primarily reflects an increase in buyers who do not meet the relatively strict GSE underwriting requirements. And banks appear to be responding to that demand.
“However, we doubt that will provide much of a boost to overall housing demand,” Pointon said. “After all, the same factors which are suppressing GSE eligible mortgage demand will also be weighing on the rest of the market.”
Capital Economics’ report explained that most lenders still seek the protection of the QM standard, therefore there is unlikely to be a significant increase in riskier mortgage borrowers.
A recent report from the Urban Institute shows lenders are slowly easing credit standards, as credit risk hit its highest level since 2013. But despite these new highs, Urban Institute explained there is still plenty of room to continue expanding the credit box.
If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5% from 2001 to 2003 for the whole mortgage market.