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42 | 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 3MReport.indd Home Equity is Highly Concentrated Not all of the country's housing wealth is equally distributed B orrowers in owner-oc- cupied homes are sitting on trillions' worth of accessible home equity by today's lending standards—but not all of the country's housing wealth is equally distributed, according to a report from the Urban Institute's Housing Finance Policy Center. Authors Laurie Goodman and Wei Li of the Urban Institute's HFPC point out that about 64 percent of the $11 trillion, or about $7 trillion, in net housing wealth in owner-occupied homes nationwide is accessible under the standard which most lend - ers today use, which is allowing homeowners to borrow about 75 percent of their home's value. That $7 trillion in accessible wealth breaks down to about $150,500 for each homeowner on average spread out among the 52 million homeowners nationwide (out of about 73 million owner- occupied units) with accessible housing wealth. However, about half of those 52 million homeown - ers have some outstanding home debt and half have none; those with no outstanding home debt had about $229,300 in home equity available to them while those who still owed money on their mortgages could access an average of about $104,900 in equity. The study revealed that the na - tion's home equity is highly concen- trated geographically, by household, and by age. Geographically, most of the accessible housing wealth in the U.S. was concentrated in four states: California, Florida, New York, and Texas, according to Goodman and Li. California has only 9.3 percent of the country's owner-occupied housing units but 20.4 percent of net housing wealth, which computes to about $2.3 trillion, and 20 percent of accessible housing wealth, or about $1.4 trillion. Broken down by household, Goodman and Li found that 46 percent of net housing wealth and 51 percent of accessible housing wealth is concentrated in 10 percent of owner-occupied homes. By age, the authors found that older homeowners have a greater share of accessible housing wealth—about 44 percent of accessible housing wealth (about $3 trillion out of $7 trillion) is held by owners older than 65, even though they own only 30 percent of owner-occupied homes. Homeowners under age 40 own 17 percent of owner-occupied homes but have only 6 percent of the nation's accessible housing wealth, according to Goodman and Li. These numbers prompt several policy questions as to how much homeownership contributes to in - equality, whether or not government policies that support homeownership exacerbate inequality, how wealth of lower-income borrowers can be better protected if house prices crash, and how to improve access to mortgage credit that allows for sustainable homeownership and enhances economic well-being. "The numbers in today's report provide a solid baseline against which to judge progress in address - ing these issues," Goodman and Li wrote. Even though home equity is highly concentrated, it is still less concentrated than other forms of wealth. According to the authors, the top 3 percent holds about 55 percent of overall wealth; the top 10 percent holds about 75 percent of overall wealth; and the bottom 10 percent holds about 25 percent of overall wealth. By comparison, the top 3 percent holds 25 percent of housing wealth; the top 10 percent holds about 46 percent of housing wealth; and the bottom 90 percent holds about 54 percent of housing wealth. Originating Investor Loans Comparing Property DTI vs. Borrower DTI I nvestor mortgage loans underwritten based on a property's income may pose unique risks but also possess strengths when compared with similar loans underwritten based on borrower income, according to Moody's Investor Service. A lender's ability to assess bor- rower creditworthiness is limited when an investor property loan is underwritten based on mortgage payments relative to property level rental income (the property debt-to-income ratio, or property DTI) instead of borrower debt-to- income (borrower DTI). "Although focusing on income from an individual single-family rental (SFR) property relative to its mortgage payments could potentially prove a better gauge of default probability than focusing on a borrower's financials, such underwriting introduces new risks, for which there is limited historical information to assess," the Moody's report stated. "The extent to which lenders effectively address the risks will drive the overall credit quality and performance of such loans." To address the new risks introduced when using property DTI, lenders are contemplating several options to address the lack of borrower information, according to Moody's. Those options include incorporating into their underwrit - ing guidelines: • Additional equity, higher credit scores, or reserve requirements; • Well-defined in-place lease/ten- ant eligibility criteria; and/or • Reviews of property owners/ third-party managers for profi- ciency in overseeing rentals. When it comes to strengths, underwriting investor loans based on property DTIs may allow lenders to better assess a borrower's tendency to default relative to property cash flows; a low property DTI indicates a low incentive for the borrower to default, according to Moody's. A form of property DTI known as debt service coverage ratios (DSCRs) is already being used by lenders in order to assess risk of default on loans backed by pools of single-family rental properties. "Although these loans could provide insight into the potential effectiveness of property DTI underwriting on single-property loans, and thus the performance of future securitizations of such loans, the performance of loans backed by SFR pools is still rela - tively untested," the report stated. "Although these loans could provide insight into the potential effectiveness of property DTI underwriting on single- property loans . . . the performance of loans backed by SFR pools is still relatively untested."