Obstacles to Making Affordable Mortgages Mount

SEP 10, 2014 4:01pm ET

RALEIGH, N.C. — Providing affordable home loans and broader access to credit is only going to get harder, experts said at a mortgage industry gathering this week.

Home prices are slowly edging up and interest rates are poised to rise, industry observers reminded at the American Mortgage Conference in Raleigh, N.C.

Meanwhile, demographic and economic shifts are creating more need for low-cost financing. Minorities and women are becoming the most likely homebuyers, especially in urban markets, and household incomes are expected to stay flat or even fall.

Add to the mix the challenges of the qualified-mortgage and other new rules, and bankers looking to originate more mortgages are in for some headaches, they said.

David Stevens, the president and chief executive of the Mortgage Bankers Association, spoke about the challenge in blunt terms.

"If we don't figure this out, you can go ahead and shut down your mortgage offices," Stevens told attendees. "We have to have a national dialogue with proposed solutions. [Lenders and Washington policymakers] need to move beyond issues with distrust."

Though some policymakers are working to address the problem, the public sector likely will be limited in the support it can offer lenders.

Providing more opportunities for borrowers is a key priority for the Federal Housing Administration, said Carol Galante, the agency's outgoing commissioner.
"The FHA has got to think about affordability" of its products, she said. "We need to responsibly improve access."
Complicating matters for the FHA is a requirement that it prove to Congress that it can have a 2% capital ratio, which limits how much the agency can reduce insurance premiums. Still, Galante has been talking more in recent weeks about increasing credit access.

Stevens noted several metrics that are sure to keep mortgage lenders up at night. Originations are expected to decline by roughly 45% this year compared with 2013 as a result of a sharp decline in refinance activity. The housing market is set to have its slowest rate of purchase activity since October 1995.

Aversion to credit risk is a big contributor. FICO scores of 620 to 720 made up less than 20% of government-sponsored-enterprise purchases last year, compared with 40% prior to the housing crisis.

Demands from the GSEs are another big factor, said James Lockhart 3rd, a vice chairman of the private-equity firm W.L. Ross.

"Part of the issue is that banks are still selling the Fannie and Freddie, which have the dominant standards," Lockhart said in an interview. "Banks, rightfully so, are still afraid of putbacks. The rules have changed so much. The standards are so tight, but they were too loose before. We're going to have to work our way to where we should go."

Lenders have adopted stricter underwriting standards in response to regulatory and market demands, Stevens said, and residential developers are building fewer lower-priced homes because of concerns about lenders' reluctance to serve that market.

"It is a balancing act, but the overcorrection is really extraordinary," Stevens said. "At the end of the day, how do we pull back from the edges?"

One promising development is the "Wealth Building Home Loan" product Bank of America and Neighborhood Assistance Corp. of America unveiled at the conference, hosted by the North Carolina Bankers Association.

B of A, which reached a long-term $10 billion contract with NACA, agreed to originate 15-year loans through a pilot program set to begin this month. Bank of America will hold the loans on its balance sheet, as well as subsidize the interest rate buy-down that is integral to the product's affordability.

Stevens and Galante were supportive of the premise behind the pilot and partnership between Bank of America and NACA.

Galante highlighted several ways the FHA could eventually play a greater role in boosting access to credit, including more work encouraging lease-to-own arrangements.

"There is an idea of testing a vehicle that would let people use FHA loans and structured agreements to allow [renters] to assume an FHA loan after renting for some time," she said. "As we go into this new world, helping people transition into homeownership … is going to be really important."

Stevens, who said he has a largely favorably opinion of the Consumer Financial Protection Bureau, still said that the agency should revisit and fix a number of rules that are making banks leery of lending to first-time homebuyers.

Demographic issues will also continue to challenge banks. Younger borrowers, particularly millennials, present great opportunities and challenges for lenders, said Lewis Ranieri, of Ranieri Partners. Key challenges involve marketing to those borrowers and overcoming consumer skepticism, he added.

"There is a systemic shift" in housing, Stevens said, with minorities and women making up a growing portion of potential borrowers. "This will likely cause stress to the square peg/square hole underwriting mentality."