Mortgage 360: Lending Standards Come Full Circle

The following guest post was written by Jackson Cooper of Jensen & Company.

The Mortgage Bankers Association expects total mortgage originations to total $1.19 trillion in 2015, an increase of 7 percent from last year. Originations have increased every quarter since Q2 2014 after four consecutive quarters of steep declines.
The National Association of Realtors said in a May press release that the market share for investors has declined, which means consumer mortgages are driving origination totals upward. Borrowers are having a much easier time obtaining mortgages as lenders have gradually loosened the vise grips on underwriting standards since the crash of 2008.
FHA loans, those backed by the federal government, are now being approved by large banks for borrowers with 580 credit scores. This is down 60 points from the standard 640 threshold in 2013. Though the underlying elements are different, the housing market of 2015 is beginning to look more and more like the post dot-com era.

Housing Bubble 1997-2006

The Federal Financial Institutions Examination Council (FFIEC) announced in an August 1997 press release that the denial rate for conventional mortgage applications was 29 percent across the country. Rejection rates had steadily increased in “each of the past several years,” according to the report. The Federal Reserve and legislators in the nation’s capital took several actions to remedy this perceived problem.
The Department of Housing and Urban Development (HUD) announced in July of 1999 that Fannie Mae and Freddie Mac would purchase $2.4 trillion in mortgages to provide low-income borrowers a means of obtaining a home loan. Fannie and Freddie would then sell packages of mortgage-back securities to investors. Countrywide became the primary subprime lender in the U.S. and one of the biggest benefactors of HUD’s plan.
Meanwhile Fed Chairman Alan Greenspan dropped the Federal Funds Interest Rate from 5.55 percent in August of 1998 to 4.74 by May the following year. It climbed again as the dot-com bubble blew up and burst. But interest rates were ultimately dropped to 1 percent by May of 2004, the lowest since 1958. Congress then passed the Graham-Leach Bliley Act in 1999. It effectively repealed the Glass-Steagall Act of 1933 that prohibited financial institutions from acting as creditor, advisor, and insurer of mortgages simultaneously.

Bubble Bursts 2007

Home ownership rates reached an all-time high of 69.2 percent in 2004. Home values reached all-time highs in 2005, while the unemployment rate was no higher than 4.9 percent from December 2005 to November 2007. Though it was clear the regulatory and legislative adjustments were working, many economists knew it was all an illusion that would inevitably correct itself.
Former Congressman Ron Paul, R-Texas, testified in front of the House Financial Services Committee on September 10, 2003. He said the special privileges given to Fannie and Freddie by federal regulators, coupled with artificially low interest rates, will lead to imminent disaster. Peter Schiff of Euro-Pacific Capital told CNBC in 2005 how all commodities, including gold and oil, were going up against both the dollar and euro, effectively debasing the currencies. Both them posited that any spike in interest rates would destroy the entire economy.
The Fed Funds Rate skyrocketed from 1 percent in May 2004 to 5.25 percent in October 2006. The rest, of course, is history.

The Sequel 2014

The saying goes “if at first you don’t succeed, try, try again.” That’s exactly what the FOMC and federal regulators commenced in 2008 after the crash. Congress passed the Troubled Asset Relief Program (TARP) of 2008, which provided $700 billion to financial institutions that would have otherwise caved by the end of that year. Lending institutions immediately tightened mortgage lending standards to the point that it was virtually impossible to get a mortgage without near-perfect credit. The Fed then instituted three rounds of quantitative easing from 2009 through the end of 2014. It ultimately purchased over $4.5 trillion in mortgage-backed securities and U.S. Treasurys in that time, effectively taking the place of Fannie and Freddie as “securitizer.”
The programs finally started to pay dividends to the housing market in 2012. Home values began climbing across the country for the first time in five years, with some areas seeing substantial increases. Boston experienced a 12.5 percent increase in 2014 alone, while Park City, Utah homes have nearly doubled in value since July 2011.
The housing bubble of 1997-2006 was the result of easy credit, low interest rates, and lax regulation. Today lenders have relaxed lending standards once again, while the Fed has now ceased its QE program that had securitized the market since 2012. Regulators backed off on the required 20 percent down payment for mortgages in October to once again open the door for more borrowers.
The methods to stimulate the housing market are largely the same now as they were before the recession. The results, however, remain to be seen.
#mortgages #RealEstate #MortgageCrisis
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