TheMReport

TH E M R EP O RT | 39 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION ORIGINATION Acceptable Risks Mortgage credit underwriting has eased over the past year according to an analysis by CoreLogic. T he analysis found that mortgage credit underwriting had eased for both conventional and Federal Housing Administration (FHA) home purchase loans in this period, with FHA underwriting standards being more relaxed than conventional loans concerning credit requirements. In a blog, Archana Pradhan, Senior Professional, Economist, Office of the Chief Economist, CoreLogic further analyzed the averages of three key factors in mortgage underwriting—debt- to-income (DTI), loan-to-value (LTV), and credit scores. She also examined the trend at the highest risk spectrum—the share of loans with very high DTI and LTV and those with low credit scores. Based on this analysis, Pradhan wrote that the average DTI for conventional loans had risen steadily since mid-2013 and had started to increase sharply after Fannie Mae raised its DTI ratio level from 45 to 50 percent in July 2017. Between the second quarter of last year and this year, the analysis found that the DTI ratio for conventional loans had risen to almost 37 percent. The DTI for FHA loans had risen similarly and reached its highest level in 14 years during Q2 at 43 percent, from 42 percent during the same period last year. "The share of loans with DTI ratio above 45 percent has increased for both the conventional and FHA products. For conventional loans, it rose sharply after Fannie Mae's move," Pradhan wrote. "The share, holding steady at between 5 percent to 7 percent from early 2012 up to Fannie Mae's announcement, had reached 20 percent in Q2 2018. Similarly, the share of FHA loans with a DTI ratio above 45 percent had increased to 38 percent in Q2 2018." Though the average LTV for FHA loans remained steady at around 96-97 percent, it rose steadily from 76 percent in Q2 2010 to 82 percent in Q2 2o18. According to Pradhan, his- torically, FHA has played a vital role in opening access to credit, with the average credit score for homebuyers with an FHA loan being lower than for those with conventional loans. And while the average credit score for FHA loan borrowers has seen a steady decline from 709 in 2011 to 681 by 2018, those for conventional loan borrowers has remained relatively unchanged within the 758-763 range since 2009. " Looking at the high-risk tail, the share of borrow- ers with a credit score less than 640 is just 1 percent for conven- tional loans compared with 18 percent for FHA loans originated in Q2 2018," Pradhan said. Homeownership Across Generations A new study correlates a person's odds of becoming a homeowner with whether their parent was one. C hildren of homeowners are more likely to become homeowners than children of renters, even as younger renters are coming late to homeownership. Such is the conclusion of a 16-year study by the Urban Institute that looks into homeownership across multiple generations. The study finds that having a homeowning parent increases a young adult's likelihood of being a homeowner by 7 to 8 percent. Parental wealth also has an effect. According to the study, for every additional 1 percent of parents' wealth, the chances of their chil- dren owning a home themselves ticks up as much as two-tenths of a percent. Young adults are more likely to be homeowners if their parents' wealth is above $200,000. "The impact of parental wealth is also higher in low-cost cities where housing is more affordable," the report stated. "Young adults in high-cost cities are also more likely to be homeowners, if their parents have greater wealth." However, a big factor in wheth- er millennials enter the market seems to be the financial crisis from a decade ago. According to the report, the relationship between parents who own and young adults who own weakened after the housing crisis. "The crisis may have shifted young adults' perceptions of homeownership, especially before the economic recovery," the report stated. "The influence of parental wealth on a young adult's home- ownership became slightly stron- ger postcrisis, probably reflecting the tighter borrowing constraints." The report suggests that a parent's wealth can be a major factor in younger homeowner- ship, as a parent typically helps a young adult with a down payment. Ironically, though, this dynamic might better help less wealthy parents in less expensive cities. "For the lower income group, parental wealth transfers may not be enough to help the child to obtain a mortgage. The high- income group will rely less on parental support, as they are likely to have enough financial resources to access homeownership indepen- dently. Whatever the reason behind it, Urban Institute found that young adults are delaying the transition to homeownership. "Millennials ages 18 and 34 are 7 to 8 percentage points less likely to be homeowners than Gen Xers and baby boomers at the same age," the report stated.

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