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Buyers
March14, 2014
Presented by
David H. Stevens
President and Chief Executive Officer Mortgage Bankers Association
Presented by Edward Pinto Codirector--International Center on Housing Risk American Enterprise Institute
The views expressed are those of the author alone and do not necessarily represent those of the American Enterprise Institute.
Blacks and Hispanics are expected to account for well over half of the growth in households from 2010 to 2025.
2
But the QM credit box is broad, deep, and pro-cyclical during a boomall FHA (and Fannie and Freddie) are eligible (see Appendix 1 (580+ FICO).
Risk Bucket
Very Low Low Medium
FICO
770 720-769 690-719
CLTV
61-70% 76-80% 81-85%
DTI
33% 34-38% 39-43%
Default Rate
0.8% 4.2% 9.3%
High
Very High
660-689
620-639
91-95%
> 95%
39-43%
39-43%
21.95%
37.7%
Note: Default rates represent cumulative defaults through year-end 2012 for Freddie Macs 2007 vintage of acquired loans. The loans included in the calculation are all primary owneroccupied, 30-year fixed-rate, fully amortizing, fully documented, home purchase loans.
3 Investor loans, HELOCs, and mandated mods add more fuel during a boom.
A Thought Experiment
To raise Black and Hispanic homeownership rates to the White rate of 73.4 percent would require the origination of 10 million 30 year loans totaling $1.7 trillion with an
average credit score of 630, a downpayment of 3.5 percent and a median debt-to-income ratio of 42%.
These loans clearly present high risks to homebuyers, neighborhoods, lenders, mortgage insurers, and taxpayers.
4.25% rate on an FHA 30 year loan with 1.75% upfront MIP and 1.35% annual MIP with a loan constant of 7.25clearly still a high risk loan.
This is due to fact that the reduced loan constant was allowed to be fully capitalized into a 67% higher home price. Amortized LTV after year 5 89%.
An alternative:
Allow the FHA home buyer to purchase a 32% higher priced home by reducing the term to 15 years, the rate to 3.25%, and the MIP to 0.65% (loan constant = 9.15).
This dramatically reduces risk to the borrower and neighborhood. Amortized LTV after year 5 70%.
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Insanity: doing the same thing over and over again and expecting different results Albert Einstein
FHAs failed effort to serve lower-income borrowers in the 1960s
Duty to Serve and Disparate Impact in the context of the procyclical QM credit box would have the same result: Increased leverage bidding up the price of existing housing, less affordable housing, and volatile home prices for those least able to cope. Mortgage has become just another word for troubleinstead of a straight, broad highway to debt-free ownership for families with the ability, desire and discipline to become homeowners. (FHA 1935)
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