Underwriting Standards Likely to Tighten and Negatively Impact Housing Indicators
The Housing Market Index (HMI) is a monthly
survey of 300 homebuilders to gauge demand for new home construction, and their
corresponding confidence. New home construction has historically contributed
roughly five percent to gross domestic product (GDP) and is therefore a strong
proxy for economic growth.
Notwithstanding the impacts of sequestration, or the
collateral damage resulting from a default by the United States on its
financial obligations - favorable demographics trends, compelling affordability
rates, and depressed inventory levels of both existing and new homes bode well
for continued overall strength in builder confidence.
Household formation rates are breaking out of their
nearly five-year slump and are expected to exceed 1.2 million new households
next year (demand side of the household equation). Juxtapose that number with
the 800,000+ rate in which new homes are being constructed (supply side of the
equation) and you have a very positive correlation.
The availability of credit across the credit and
income spectrum will have a large impact on whether households decide to rent or
Case in point, the December HMI saw strong sustained
growth, but cited the tight credit market as the largest obstacle to a robust housing
market recovery. With the new regulation from the Consumer Financial Protection
Bureau (CFPB) released last week, along with the anticipated tightening of Federal
Housing Administration (FHA) underwriting standards, it is very likely that the
problem of the shrinking credit box and the unyielding regulatory burden for
originators will have a distinctively negative impact on the HMI and other
confidence, as measured by the HMI, may break from its eight-month increase
this month. In December, the HMI
boasted three consecutive quarters of improvement. The index, calculated by the
National Association of Home Builders (NAHB), measures current sales
expectations, sales expectations for six months in the future, and prospective
buyer traffic. NAHB noted in their December release that tight credit remains
the largest obstacle to growth in the housing market, saying that the “one thing that is still holding back potential home sales is the
difficulty that many families are encountering in getting qualified for a
mortgage due to today’s overly stringent lending standards.”
Unfortunately, the new regulation
issued by the CFPB just last week may have further raised the bar for
10, 2013, the CFPB issued the much-anticipated final Ability-to-Repay/Qualified
Mortgage (QM) rule. The final rule, scheduled to be effective January 2014,
codifies eight requirements for lenders to verify a borrower’s ability to
repay. The rule also establishes two QM constructs with more legal protection
for lenders. For the safest,
highest credit quality borrowers, the rule creates a safe harbor, and for
higher-cost or less prime borrowers the rule establishes a rebuttable
presumption of compliance.
tightened underwriting standards required for FHA insurance earlier this month.
FHA increased the upfront fees charged to borrowers from 1.75 percent to 2.25
percent. FHA will also begin to
require borrowers with a credit score of less than 580 to pay a ten percent
down payment. These changes will be effective this spring.
housing market, with government entities as the primary purchasers of
mortgages, it is likely that if and when the private market returns, investors
will gravitate toward loans meeting the QM safe harbor standards and other
stringent standards such as the FHA changes. This ‘race to the top’ in mortgage
lending will only further contribute to the credit problem in the short run.
the rule is not yet effective, it will likely begin to impact market
expectations soon. We can expect these changes to manifest themselves in
forward-looking housing indicators.