January 2016 - Out of the Woods

TheMReport — News and strategies for the evolving mortgage marketplace.

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46 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Consumers Don't Understand Mortgage Qualifications Fewer than one-fourth of consumers are aware of 3-percent and 5-percent down payment programs. A lthough credit standards are easing, job markets are improving, and consumers continue to show the desire to own a home, actual homeownership remains at a low level across the nation. So why are consumers not cap - italizing on the positive economic conditions the mortgage industry has been experiencing? Fannie Mae's Economic & Strategic Research Group determined in a recent survey of 3,868 consumers that consum - ers are not knowledge- able about the mortgage qualification process. "Advancing from aspira- tion to sustainable home- ownership is more likely to occur if consumers have an accurate understand- ing of the requirements to qualify for a mortgage," Fannie Mae stated in the report. "While it can take years to improve one's credit score or save for a down payment, undertak - ing such efforts based on inaccurate information may lead to a needless delay in reaching the goal of own- ing a home." The survey showed consum- ers lack a basic understanding of minimum mortgage qualification requirements among all consum- ers, but especially among renters who want to buy a home in the next five years. When questioned about mortgage criteria such as down payment, credit score, and debt-to- income ratio, about half of those surveyed could not provide an answer, while only 23 percent are aware of the 3-percent and 5-per - cent down payment programs. Consumers do appear to check their credit score, with 80 percent of consumers indicating they have seen their credit score, but 49 percent either do not know what their score is or give a number outside of the scoring range. Survey results found consum - ers believe lenders are the "most influential" source of information for obtaining mortgage advice, fol- lowed by family and friends. "Lenders are in a vital position to help close consumers' knowl- edge gap of what is required in today's mortgage market to suc- cessfully obtain mortgage credit," Fannie Mae concluded. "Our re- sults also suggest opportunities to partner with Realtors, counselors, and other groups to help minor- ity consumers build knowledge in the early stages of buying a home. Another element of good news is the large share of 'don't know' responses as it is easier to provide new knowledge than to reverse misperceptions." Mid-Tier Credit Score Lending Declines The decline in mid-tier lending disproportionately impacts repeat homebuyers. M ortgage lending to borrowers with mid-tier credit scores has severely declined since the mid-2000s, even after Fannie Mae made eligibility changes. Fannie Mae defines a mid-tier credit score as a FICO between 680 and 740 in its newest study from its Pricing and Underwriting Mortgage Analytics group. The study determined Fannie Mae's eligibility changes had little impact on mortgage lend - ing volume, especially to mid-tier borrowers. In addition, repeat borrowers are suffering more from the drop in mid-tier lending than first-time homebuyers. "This decline in repeat bor - rowers is strongest along the U.S. coasts, where the housing crisis diminished borrowers' abilities to retain or gain equity in their current homes, reducing their likelihood of selling their existing homes and purchasing new ones," the report stated. The study showed first-time homebuyers are up by 45 percent in 2014 compared to 2002, while repeat homebuyers are down by 40 percent over the same time period. Fannie Mae's Consequences of Declining Mid-Tier FICO Credit Score Lending: • Lower FICO can lead to exist- ing households being potentially "locked" in to their mortgages and properties. • These borrowers might not even be able to benefit from low mortgage rates by turning over their existing properties and purchasing new ones if their equity levels are low or if they are underwater. • Some homeowners who locked in lower-than-current market rates on their mortgages may have less incentive to move, since any home purchased today would become more expensive than their current residences based purely on prevailing interest rates. • Some homeowners who could benefit from current low mort- gage rates may choose not to get back in the housing market if they have seasoned their loan and are amortizing mostly principal. • Stagnant wages and the slow recovery of housing prices have also played a role by impact- ing the income and wealth of home buyers and reducing the likelihood of changing their residences. "Policy changes that expand "ac- cess to credit" programs to include repeat borrowers may encourage home purchase activity within the mid-tier FICO segment," Fannie Mae concluded. "For borrowers who lost significant value on their property, carefully designed renova - tion products may provide some level of support. This would not only help borrowers to achieve their home of choice, but also would in- crease house values and could open up avenues for possible future home sales and turnover buyers." "Lenders are in a vital position to help close consumers' knowledge gap of what is required in today's mortgage market to successfully obtain mortgage credit." —Fannie Mae

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