How Can 35% of People Buy a Home?

There's a rather disturbing statistic hitting the news this morning. The Associated Press reported more than 35 percent of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released today by the Urban Institute.

That means that more than one-third of U.S. citizens have a lousy credit score. As we tighten credit guidelines in the mortgage industry, forget about income, debt-to-income ratios, assets, capacity, character or collateral. More than one-third of Americans can't afford or qualify to buy a home. How can they if they're going to a collections agency? They might already have a mortgage, but where is the new one going to come from?

The Urban Institute's Caroline Ratcliffe told AP that stagnant incomes are key to why some parts of the country are struggling to repay their debt. Incomes are not keeping up with inflation and, therefore, people are making less money. The study found southern and western states hit hardest by this phenomenon, including Texas and Florida. Locations like San Jose, Calif., and Boston, had a lower percentage of debt heading to a collections agency.

Let's hope there isn't another tech bubble out there, or that 35% is likely to rise another 10% to 15%.

As for the mortgage industry, some of these 35% might even have problems getting into an apartment much less a home. On the bright side, 65% of Americans are not called by a collections agency. The question is: how much debt do they have and can they qualify under a 43% debt-to-income ratio?

The American Bankers Association said people "increasingly pay off balances each month. Just 2.44 percent of card accounts are overdue by 30 days or more, versus the 15-year average of 3.82 percent." They're not overdue, but are they paying the minimum amount each month. That's what's still getting counted on the mortgage application--the minimum amount paid each month.

Therefore, a good credit score and credit cards paid on time applies to a maximum of 62.56% of Americans who need to have a 43% debt-to-income ratio, including the mortgage payment. They also need to have a good, consistent income to make the monthly payments and enough savings to put down at least 5% on a home.

Mortgage credit is going to need to loosen up a little to get more people into homes. It doesn't look like that's going to happen anytime soon.

--RM

Mortgage Bankers: 'Wait 'Til Next Year'

The Reality of Real Estate Finance

For real estate professionals, May through July is the equivalent of October through December for retailers and “Christmas in July” is now gone for the mortgage banker. Retailers felt the pain during the last holiday season and the mortgage market is feeling the pain today. However, as the Brooklyn Dodgers once said at the end of a heartbreaking season, “wait 'til next year.”

There’s no secret as to why mortgage activity dropped significantly this year:

•         Fewer first-time homebuyers
•         Higher student debt
•        All cash buyers
•        Tighter credit due to new regulations 

There’s no reason to go further. This isn’t rocket science.

The National Association of Realtors reported June existing home sales up by 2.6% but down compared to last year. First-time homebuyers averaged 28%, as renting became the “new normal” over buying a home.

First-time homebuyers are typically drivers for the housing and mortgage markets., but low wages, more than $1 trillion in student debt, higher FHA insurance premiums and an increase in downpayments continue to keep first-time homebuyers out of the housing market. Also, the refinance market dried up after mortgage rates increased last year, which also kept mortgage bankers grappling for customers.

Unlike mortgage borrowers, all-cash buyers have no worries about downpayments or debt-to-income ratios or even going through a laborious “paper chase” of finding banking statements, income tax returns, W-2’s, and car titles so that all the i’s are dotted and the t’s are crossed. And, at the last minute before closing, an all-cash buyer doesn’t need to find one more statement to make sure $250 was a valid deposit into a bank account. Maybe I exaggerate, and maybe I don’t.

While Realtors still have business from all-cash buyers, the mortgage industry remains hungry.

Today’s Qualified Mortgage (QM) rule puts the debt-to-income ratio at 43%, including the debt on a home. Mortgage lenders are very paranoid about buying back loans. They go lower on the debt-to-income ratio to insure they won’t have to repurchase loans. A recent FICO survey said nearly 60% of bankers are most concerned about a “high debt-to-income ratio” when approving a loan.

And, above all else, housing prices continue to rise—albeit slower than last year.

Now, here’s the good news for mortgage bankers. The market should come back next year. As the old saying goes, “No pain, no gain.” And there will be pain. Home prices will have to drop for housing to become more affordable for the first-time homebuying crowd, including the Millenials. In fact, in that same FICO survey, many lenders fear another housing bubble and a pop is not only likely but necessary.

Institutional and small investors have pushed up housing prices, but a drop in valuations is a good thing because affordable homes and low mortgage rates will get first time homebuyers into the marketplace.

Credit will need to loosen—and likely will--including 3% downpayments on Fannie Mae and Freddie Mac loans and lowering the FHA insurance premiums. Also, more lenience on the debt-to-income ratio from the Consumer Financial Protection Agency will help first-time homebuyers with student debt afford an additional housing payment to replace that rent payment. With apartment rents increasing, housing will become the best investment, especially with a tax deduction.

With looser credit, more affordable home prices and some more job security, with potential for increased wages, we can see a true housing boom next year—a real one—that will not only benefit real estate agents but mortgage bankers as well.

For those mortgage bankers who survive the heartbreak of the current mortgage cycle, hold on tight. Wait for prices to fall during the winter months. Watch the retail sector feel some more holiday season pain as consumers save their money. And then know future first-time homebuyers are on their way to buy a home in spring 2015.

In other words, wait until next year.

Severity of Financial Crisis to Blame for Low Wage Growth...Really--You Think?

This DSNews article is pretty much stating the obvious. When the Federal Reserve is basically giving away money to banks/investors, and companies are buying back stocks to keep earnings looking positive for the "investors," companies can't afford to increase wages. Wells Fargo researchers explain it in a different way, but the outcome is the same. Enjoy!

WSJ: Existing Home Sales Hit Highest Level Since October

Yes, existing home sales hit their highest level since October, but June is typically the best time of the year to buy a home. It's like retail spending higher during the Christmas season and not as high as last year. July and August will likely make for a better litmus test. Also, first-time homebuyers remain low at 28%--typically, they're 40% of the market. One expert has said that a $1.2 trillion market might be the "new normal." I'll defer to this Wall Street Journal article by Josh Mitchell for the overall story.

Welcome to The Mortgage Business Report

I would like to welcome the mortgage banking industry to The Mortgage Business Report. This daily newsletter is a compilation of daily news and analysis of the housing and mortgage market. It begins today, June 22, 2014, with the June Existing Home Sales report from the National Association of Realtors and continues during the day with updates of news and analysis from across the United States.

What makes this different from a regular trade publication? The analysis is not only from reporters and newsmakers but from bloggers who have no agenda to the industry. It means you'll get objectivity on an industry that is trying to recover from the housing crisis of 2008.

At this moment, the mortgage market faces its greatest challenges:

• First-time homebuyers are struggling with student debt and low wages
• Qualified Mortgages (QM rules) are keeping debt-to-income ratios tight
• Housing affordability is an issue as home prices rise at a slower pace
• Shadow inventory is in question and homebuilders are not building
• Income inequality is seeping into the housing market
• The 'Millenial' generation favors renting over owning a home
• The private label Mortgage Backed Securities market is a distant memory
• Owning a home means taking on debt in a debt averse nation

Even new home sales are dropping.

However, unemployment is at 6.1% (the U-6 number is 12.1%). While the wages for first-time homebuyers and their payments on student loans keep housing sluggish, real estate investors (buy to rent) and all-cash buyers that moved the market last year are dropping off.

The Mortgage Business Report is not about "doom and gloom." We will make our best efforts to keep the housing and mortgage market outlook as objective as possible. Interest rates remain remarkably low and some mortgage companies are in locations that still have strong employment numbers.

So let's get started. Have a great day and enjoy our new publication--The Mortgage Business Report!