March 2016 - RIP Dodd Frank

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10 | TH E M R EP O RT TAKE 5 problem I see is if one or more companies scores tens of millions of previously unscored individuals, 80 percent of those scores will be below a score of 660 (my estimate based on company data). A score of 660 is the demarcation line traditionally used for subprime credit. Secondly, it will increase the group of borrowers who have scores between 500 and 660 by 40 percent—FHA's desired sweet spot. Given FHA's very risky lending standards and lack of pricing for risk, this could flood the housing market with lots of new very high- risk loans. These loans will likely be concentrated in low income and minority neighborhoods. My fear is this will once subject these neighborhoods to high foreclosure rates and homebuyers, who have the least ability to ride out this leverage induced boom and bust in home prices, to collapsing prices as credit completes its cycle. M // What will the homeowner- ship picture look like in 2016? PINTO // It depends on how you measure it. I think the homeown- ership rate, which is one measure, will continue to decline slowly as the number of outstanding foreclo- sures continues to work its way through the process. When it does, they will move out of the home- ownership category that they're technically currently in and likely will become renters. That said, the first-time homebuyer marketplace is very strong today. We find that the share of first-time homebuy- ers among the five agencies is very high—well over 50 percent—and the numbers of purchase loans to first- time homebuyers is up 20 percent year-over-year. We expect that will continue to be an increase year- over-year for the foreseeable future. M // What do you think will be the biggest change in the mort- gage industry in 2016? PINTO // I expect a reduction in FHA's premium, which will cause a further share shift to FHA. I don't support this because the FHA's capital position is pre - carious. We're now in the seventh year of an expansion. Even their own actuary said [the] year before last that late in the expansion, your capital levels should be well in ac - cess of the minimum. In 2015 they were at the bare minimum. M // Is there anything positive on the horizon we can expect? PINTO // Home price gains will continue to be robust, which is viewed as bullish for housing. We have now had a seller's market and rising prices for 40 straight months. This makes homes less affordable for first-time homebuyers. In 2015, house prices were up somewhere between 5.5 and 6.5 percent, depending on which index you use. Inflation is something around 1 percent, depending on which index you use. Incomes are up maybe 2 percent. That is not sustainable and over time is dangerous. I expect house prices to increase by at least 5 percent in 2016, substantially faster than both incomes and inflation. This is due to greater demand pressing against a constrained sup - ply of homes. I expect demand by The Future of Housing Policy— One Analyst's Predictions for 2016 and Beyond Currently an American Enterprise Institute (AEI) resident fellow, Edward Pinto is the co- director of AEI's International Center on Housing Risk, where he researches policy options for rebuilding the U.S. housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing. Who better to consult for a full picture of today's housing market than this industry ace. first-time homebuyers to continue to be extremely strong. When you have a strong demand against a rel- atively fixed supply, you get higher prices. This can only continue with increased loan leverage, something the FHA is perfectly willing to do. These trends are viewed in the mainstream media and the mort- gage lobby arena as being positives, but we've been down the road before of unsustainable house price increases. M // Will the seller's market we've been experiencing hold strong? PINTO // I believe it will. Currently, 70 percent of first-time homebuyers have down pay- ments of 5 percent or less, and 28 percent have a total debt-to-income in excess of the QM limit of 43 percent. That is not a tight credit box. Yes, the FICO scores aren't as low as they were 10 years ago thankfully, but still, there are a lot of borrowers that are below 650 that get loans through FHA. These are not signs of a tight credit box. The FHA is actively pushing lend - ers to lend to even more high-risk borrowers, and the seismic shift in share away from large banks to nonbanks facilitates this. This, along with other bullish trends, will feed continued demand pressure. In December, months existing home inventory dropped to below four months, even deeper into seller's market terri- tory (marked by an existing-home inventory of six months or less). M // What is the most important issue affecting the mortgage industry that has your attention? PINTO // Right now, the discus- sions about greatly expanding the scoring of credit visible, but unscorable and credit invisible individuals. While I favor better scoring metrics and methods, it is FHA pricing and underwriting policies that present the problem. It has an extremely risky credit box—down to 500 credit score with 10 percent down and down to 580 with 3.5 percent down. It is continually saying, "We wish lenders would lend to the full extent of our credit box." The

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