TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/57493
COVER STORY spooked. And the way forward involves both camps giving a little to get back some normalcy. Then and Now O n a long enough timeline, today's credit still looks relatively cheap: Besides FHA, VA, and the offerings you can find at most community banks, thrifts, and credit unions, even the big lenders' prime mortgage standards compare favorably to the 1990s and earlier days. But last summer, analysts from the ratings agency DBRS compared prime requirements from the housing peak with the most recent standards, and they found that the mortgage process had indeed gotten scary for consum- ers accustomed to easy closings. Average FICO scores had risen from the mid-600s to the 700 range, and mountains of exacting documentation had become the norm. Loan maximums were cut in half, to $1 million, and down payments have crept up to about 22 percent on average—a far cry from the all-time low of 19 percent in mid-2007, if a bit lower than the average since 1973, which is 24.3 percent, according to the FHFA. Negative amortiza- tions, balloon payments, adjust- able rates under five years, and all loans longer than 30 years are basically nonexistent, vestiges of a looser economy. "Pretty much, nobody's taking out ARMs," says Amy Crews Cutts, chief econo- mist at Equifax. Part of the new stringency, of course, is driven not only by the markets, but also by the Dodd-Frank financial reforms. Underwriters are still working out the differences between qualified mortgages (QM's), which require lenders to retain a 5 percent prin- cipal risk, and qualified residential mortgages, which come with higher borrowing standards but release originators of any "skin in the game" requirements. The University of North Carolina's Center for Responsible Lending re- cently determined that 45 percent of mortgages originated between 2000 and 2008 wouldn't have met the most basic QM guidelines; they also found QMs would be virtually out of reach for most African-Americans and Latinos, leaving them to scrounge for loans nearly 200 basis points above prime. "We're still paying the price for the era of easy credit," Greg McBride, senior financial analyst for the Palm Beach-based Bankrate. com, told the Chicago Tribune last summer. "Credit standards are in- deed tighter than they have been." is turning a corner. "This is a big positive boost to credit markets," they wrote in early February, "as stable lending standards provide a degree of certainty to borrow- ers that they can access credit when needed at terms they can count on meeting." That's great—but the word isn't filtering down to consumers, at least not where residential loans are concerned. "This recovery seems to be happening on the "We're not seeing a pickup in home purchase activity. We've got record low interest rates—so much so that even though I refinanced back in November, I could go out and refinance again—and we're seeing almost no response to that from borrowers" — Amy Crews Cutts, Equifax The Consumer's Conundrum S till, consumers in the market should realize they've got a sweet deal going, comparatively speaking. Equifax's Crews Cutts says the company's analysis of recent data shows some promis- ing trends. "We're starting to see an uptick on borrowing on credit cards and other non-mort- gage debt like auto loans," she says. "Those are indicative of an improving economy." That tracks pretty closely with what the Federal Reserve found in its first 2012 Senior Loan Officer Survey on Bank Lending Practices: The 56 responding banks reported that consumer credit demand was rising slightly, as lending standards stopped tightening for the first time since the recession's start. Wells Fargo's analysts interpreted the Fed's survey to mean the market consumer side, but not so much in the consumer space," Cutts says. "We have a falling unem- ployment rate, which bodes well. We have a falling delinquency rate, which bodes well. But we're not seeing a pickup in home purchase activity. We've got re- cord low interest rates—so much so that even though I refinanced back in November, I could go out and refinance again—and we're seeing almost no response to that from borrowers." Why? For starters, just because underwriting standards have stopped rising doesn't mean they're loosening, either. "Credit still remains what it was about a year ago, which is extraordinarily tight," Miller says. And that's feed- ing the new normal for consum- ers: Borrowing doesn't feel easy in this economy—heck, nothing feels easy. Americans, beaten down by the depths of the now-subsiding recession, are consequently hun- kering down. According to a late 2011 FICO report on consumer behavior, "One significant behav- ioral change can be seen across almost all score levels: Spending is way down." But even beyond spending patterns, borrowers are avoiding major lenders like the plague: With corporate profits at all-time highs, far outpacing the average joe's gains, consumers just don't trust big banks to look out for them nowadays, and that deficit of credibility drives away borrow- ers. That's not all banks' fault, of course. "A lot of it is very clearly that the hassle of getting a home loan is so much more elevated now," Crews Cutts says, citing paystubs, tax forms, and "letters of explanation for small devia- tions" that were unheard of in the boom. "The hassle factor goes up, and with it the perception of 'no' goes up, too." It's not clear that laxer un- derwriting standards will get borrowers to jump into the market just yet, either. Everyone's looking for a good deal—that is, they're looking for rock-bottom prices and interest rates. The Fed has already signaled that rates will stay low through 2014, and plenty of economists are forecast- ing further price drops. So if rates stay constant, and foreclo- sure inventory is still moving through the pipeline for the foreseeable future, why not wait for a better deal? "The mortgage market is going to stay sort of in the toilet," Crews Cutts says, "unless consumers can funda- mentally change their attitude about spending." The Banks' Blues B ut should lenders change their attitudes, too? Yes and no. Banks have a lot on their minds besides writing new mortgages. One-third of large banks polled by the Fed this January said that capitalization concerns were "somewhat important" in their tightening of credit standards. Chief among these concerns is repurchase risk: With the govern- ment pretty much singlehandedly propping the secondary market THE M REPORT | 23