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Delinquencies and Home Equity

home pricesThe Urban Institute’s Housing Finance Policy Center released its monthly chartbook, revealing an expanding housing market with rising equity, a low share of adjustable-rate mortgages (ARMs), and a continuing rise in the presence of nonbank mortgage loan originators.

Growing household equity is amplifying the value of the housing market. As of the first quarter of 2018, total household equity stood at a record high of $15.7 trillion, the Urban Institute reported according to data from the Federal Reserve. Meanwhile, debt and mortgages held steady at $10.6 trillion.

Mortgage loans continue to perform well. The hurricanes in the second half of 2017 led to a spike in serious delinquencies, bringing them to 1.72 percent. However, as of the first quarter of this year, serious delinquencies were down to 1.45 percent, and 1.16 percent of loans were in foreclosure.

The total value of the housing market is up 10 percent from its pre-crisis peak reached in 2006, now at $26.4 trillion, according to the report.

Taking a look at the composition of the mortgage market, the Urban Institute found agency mortgage-backed securities accounted for 59.3 percent; unsecuritized first liens at the GSEs, commercial banks, savings institutions and credit unions accounted for 30.1 percent; private-label securities accounted for 4.9 percent; and second liens claim the remaining 5.7 percent of the market.

With interest rates on the rise, first lien originations dropped 16 percent over the year in the first quarter, totaling $380 billion.

When it comes to the types of mortgages fixed-rate mortgages continue to dominate the purchase market while ARMS claim just a meager market share.

As of May 2018, 30-year fixed-rate mortgages accounted for 89.0 percent of new purchase loan originations, while ARMs made up just 5.6 percent of new originations. While this disparity has been the trend of late, the Urban Institute pointed out this wasn’t always the case.

During the peak of the housing bubble in 2005, ARMs made up 52 percent of new originations. In 2009, they plummeted to just 1 percent of the market. They climbed back to 12 percent in December 2013 before declining to today’s 5.6 percent.

Moving forward, “We would expect the ARM share to remain low as long as mortgage rates stay relatively low and the yield curve remains relatively flat by historical standards,” the Urban Institute said.

Also of note in the monthly chartbook from the Housing Finance Policy Center is the fact that nonbank mortgage originators are continuing to grow and are contributing to an expansion in credit access.

Nonbank originations make up more than half of agency volume, according to the Urban Institute, claiming 79 percent at Ginnie Mae, 55 percent at Fannie Mae, and 58 percent at Freddie Mac.

Having recently reported an expansion in credit access according to its Housing Credit Availability Index, the Urban Institute reflected that its index reached its highest level since 2013 in the first quarter of this year, and nonbanks are a major contributor to this increase.

“Nonbank originators have played a key role in opening up access to credit,” the report noted.

While median loan-to-value ratios for nonbanks are similar to those recorded at banks, debt-to-income ratios are higher.

However, rising interest rates are contributing to higher debt-to-income ratios among all originators across the board, with the Urban Institute explaining: “Rising DTIs are to be expected in a rising rate environment, as higher rates and usually accompanying higher home prices drive up borrowers’ monthly payments, and the reduction in refinance volumes makes lenders more apt to work a bit harder to get a loan approved for a marginal borrower.”

Regardless, credit is still relatively tight, as evidenced by FICO scores on new purchase loans. The bottom 10th percentile of FICO scores stood at 648 in April, up from the low 600s prior to the housing crisis.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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