Mortgage Lenders Loosen Credit Standards: Will a Rush of First-Time Buyers Follow?
Q2 2021 is just getting started and the market, along with the economy, is shifting.
In a trend we’ve seen for a while, interest rates are increasing as the economy continues to climb back. Unemployment levels are decreasing, consumer spending is trending up, and the most recent economic stimulus package has ushered in optimism.
But the housing market still faces difficulties. Demand is at all-time highs, while inventory remains at its lowest supply in recent years. Plus, as interest rates continue to climb, refinance volume chips away week by week. While buyer demand has kept volume stable for mortgage lenders, high home prices and competitive bidding wars are locking many buyers out of the market.
In response, many lenders have loosened their credit requirements, but with all of the other issues we’re facing, it’s hard to know if the move will work.
Interest rates continue to climb.
Rising interest rates haven’t helped in keeping volume up for lenders across the country.
The Mortgage Bankers Association (MBA) reported that the 30-year fixed mortgage rate averaged 3.36% last week, up from 3.30% the week prior. This contributes directly to the continued drop in refinance volume, now in its fifth straight week of decrease. Currently, refinances contribute 60.3% in total origination volume. Just a few weeks ago, that number was around 64%.
As a whole, mortgage applications were down 5.1% last week. This isn’t great news, but probably isn’t as bad as it looks on paper.
Higher interest rates aren’t necessarily a bad thing. In fact, higher interest can indicate a healthy economy, as low interest rates are often used to stimulate economies and drive consumer demand, as was the case during the pandemic.
“Bad economic news is often good news for mortgage rates. When concern about the economy is high, investors gravitate toward safe-haven investments like Treasury bonds and mortgage bonds, pushing bond prices higher but the yields on those bonds lower,” said Bankrate’s Chief Economist Greg McBride.
Even though the pandemic continues to run through the population, the massive vaccine effort and better control of spread have made it possible for more businesses to reopen and jobs to be restored.
We’ve experienced the wildest 12 months of mortgage originations ever. Volume is coming down, as we knew it would. What’s important to remember is that what we’re seeing is in many ways simply a return to normalcy.
Will looser mortgage credit standards help lenders keep up the pace?
To this point, lenders have been originating most loans for buyers with higher credit scores. However, to respond to the potential decreases in volume over the next year, lenders have begun loosening their credit ratings, opening up homeownership to a larger pool of buyers.
The MBA’s Mortgage Credit Availability Index increased by 0.6% last month and is now sitting at 125.4. Increases have been seen across all loan types, from government-backed loans to jumbo loans.
As the economy climbs back, it’s natural to loosen credit standards as the need to consolidate risk decreases. This will help first-time buyers, especially millennials, get their feet into the market.
“As we look ahead to the expected growth in the purchase market, which will be driven by millennials and first-time home buyers, credit availability to qualified borrowers will play an important role in supporting this demand,” said Joel Kan, Associate Vice President of Economic and Industry Forecasting at the MBA.
Of course, there’s a catch. The barrier to entry for many younger and first-time buyers is skyrocketing home prices, which subject them to higher monthly mortgage payments. Millennials and younger cohorts are less likely to have savings for a down payment, which doesn’t help their ability to qualify or pay for a loan. Plus, the market, as it stands, makes it hard for any buyer to find a home thanks to low inventories and intense bidding wars across the nation.
That leads us to question how effective loosened credit requirements will be. Will they help? Probably—but the degree of impact remains to be seen.
Sky-high demand continues to push home prices up.
Usually, high demand is a good thing. But in the case of the current low-inventory market, it’s pushing home prices through the roof and closing access to many buyers.
While the steady stream of buyers is encouraging, it’s essential that new construction and the total number of homes on the market increase sometime soon. But that’s where the issue lies.
Builders aren’t going to ramp up construction if interest rates continue to rise. Higher interest rates tend to decrease demand. Building now, especially when construction costs are expected to increase by up to 6% this year, according to global commercial real estate firm Jones Lang LaSalle (JLL) research, simply doesn’t make sense. Plus, builders know demand will potentially fall off and contract-to-close times will increase.
Despite this, the MBA projects that more than a million new homes will be built in 2021.
With the inventory issue front and center, some have called for government intervention. Lumber, the main component of residential construction, has faced vicious spikes in price thanks in part to tariffs.
“We’re trying to bring down lumber prices, which are very high right now. In April it was around $350 per thousand boards. Then it peaked in September to $955, now it’s at around $600,” said Nanayakkara‑Skillington, Associate Vice President of Forecasting and Analysis at the National Association of Home Builders (NAHB).
Lower lumber prices could help the industry tremendously, but the Biden Administration would need to take action.
Beyond the Federal government, local and state laws play a huge role. Regulations and zoning laws can make or break a builder’s ability to construct new homes. They can also damage the ability for certain income brackets to live in particular areas.
“Over the last 20 or 30 years, various regulatory burdens, particularly with land, have gotten tighter and tighter,” says Robert Dietz, Senior Vice President and Chief Economist at the NAHB. “There are greenspace requirements, there are also exclusionary zoning laws, which basically income segregates. Without a serious change in policy, these inventory problems will persist.”
How does this impact lenders?
The first goal should be to transition out of refinance origination. We’ve been reporting on this for a while, but time is running out.
The next step would be to prepare your team for market fluctuations moving forward. Interest rates will continue to climb, but there’s still uncertainty in how volume will move due to various macroeconomic conditions.
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