8 takeaways on mortgages after the housing bust

Among the takeaways: Borrowers are having trouble making big down payments, and lending is coming back faster for investors.

By MSN Real Estate partner Sep 24, 2013 6:48AM

Neighborhood © Nancy Nehring, Photodisc, Getty ImagesBy Nick Timiraos, The Wall Street Journal

 

Wall Street Journal on MSN MoneyBanks made more mortgages last year than in any year since the housing downturn struck in 2007, buoyed by interest rates that reached their lowest levels on record, according to federal lending data released Sept. 18.

 

The data were collected from 7,400 financial institutions under the Home Mortgage Disclosure Act. Researchers at the Federal Reserve who analyzed the data also published a paper full of noteworthy observations. Here are eight takeaways:

 

1. Lending is up, but there's a big asterisk. While the number of mortgage loans made in 2012 increased by 38%, most of that came from refinancing. The number of loans made to people actually buying homes increased by 13% to levels that were still shy of every year between 2000 and 2009. Refinancing got a big boost from low mortgage rates and from retooled federal programs to help borrowers refinance even though they didn't have any equity in their homes.

 

Post continues below.

2. Borrowers are having trouble making big down payments. Loans made by the two federal agencies with the easiest terms today — the Federal Housing Administration, which requires down payments of just 3.5%, and the Department of Veterans Affairs, which makes loans to veterans and doesn’t require any money down — accounted for almost 45% of owner-occupant home-purchase loans. The share of FHA borrowers with incomes above $100,000 has nearly doubled since 2007, to around 15%, according to the Fed researchers, but the median incomes of FHA borrowers was still 40% lower than incomes of borrowers taking out conventional loans.

3. Large racial and ethnic wealth gaps persist. The number of loans for home purchases by Asian and white borrowers increased by 15%, while lending to African-Americans and Hispanics increased at less than half that rate. Home-purchase lending was also weakest in low-income census tracks that have a high share of minority households.

 

4. The CRA didn’t cause the crisis. In recent years, some critics have argued that the Community Reinvestment Act, a 1977 federal law designed to ensure banks were serving poor neighborhoods, was partly responsible for the mortgage crisis. But the Fed researchers tracked CRA-eligible loans made by banks in 2006 — the peak of the housing boom — and found they had below-average delinquency rates. "These findings are inconsistent with the notion that the CRA was a principal driver of the mortgage and financial crisis," the Fed report concluded.

 

5. Loan quality is pristine. Average credit scores rose from 701 to 728 for home-purchase loans between 2006 and 2010. Another measure of loan quality, the rate of early delinquencies, has plunged. For conventional home-purchase mortgages made in 2010, just 0.5% of loans had missed two or more payments within their first two years, about 1/20th the rate for loans in 2006.

 

6. The "qualified mortgage" rule shouldn’t be a major problem. Starting in January, banks now can face additional legal liability if they don't properly ensure that borrowers have the ability to repay their loans. The Consumer Financial Protection Bureau issued a "qualified mortgage" standard earlier this year that sets out the steps banks can take to prove compliance with the ability-to-pay standard. The "QM" definition says that borrowers can't have total debts in excess of 43% of their monthly income, though the cutoff doesn’t apply to loans that are sold to federally related entities. Around 22% of home-purchase loans in 2010 had debt ratios above 43%, but 70% of those loans were government-backed, meaning they could have still been deemed "qualified" mortgages.

7. Lending is coming back faster for investors. Since 2009, lending to non-owner-occupant buyers "has grown more robustly than owner-occupant lending." Lending to investors and buyers of vacation homes rose from 12% of all home-purchase lending in 2010 to 15% of the market in 2011 and 2012.

 

8. Home-equity lending is way down. During the housing bubble, many homeowners used second mortgages, or "piggyback" loans, eliminating the need for a down payment in some cases. Others used home-equity loans to take cash out of their house to fund renovations or other spending. In 2006, nearly 1.3 million borrowers used a second mortgage to buy a home; that fell to less than 42,000 in 2010, and it has stayed near that level in 2011 and 2012. Meanwhile, home-equity loans for home improvement fell to 73,000 loans last year, down from nearly 600,000 in 2006.

 

More from The Wall Street Journal:

 
69Comments
Sep 27, 2013 7:18AM
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 Mortgage mess not going away not going to change to many crooks run the show. We will change things when we put some in jail the rest will get the message.  Then will come the change if we had put some in jail when we learned in the start it would be better now but we didn't.  lesson is if you don't fix it it stays broken.............DU

Sep 27, 2013 7:07AM
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Wait, so they deemed that the CRA didn't cause the crisis by looking only at CRA-eligible loans? I guess cause and effect mean nothing to the researchers?

Cause: CRA required banks to loan to poorly qualified buyers
Effect: New high-risk loans are created and used to satisfy this requirement

Cause: CRA gets updated in the mid 90s to satisfy the Clinton administrations goal of increasing minority home ownership
Effect: Additional requirements are put on banks who now have to provide MORE loans to poorly qualified buyers

Cause: Repeal of Glass-Steagall in '99 allows banks to offload many of the significant risks with all of these "sub-prime" loans MUCH to the happiness of the administration
Effect: Banks can now effectively loan money to the unemployed homeless with little to no risk to themselves

Yeah, it sure sounds to me that CRA had no hand in the problems. Unless you look at the fact that the CRA is the primary reason most of the vehicles used by those who couldn't afford houses existed in the first place.

I'm glad that the federal researchers had no administrative bias in their reporting.
Sep 27, 2013 5:57AM
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If you want anything totally FUBAR and running in the red, turn it over to a gubmint agency and it will happen in a flash.

 

There is too much gubmint control especially when you consider most of the gubmint people trying to run gubmint agencies have never held real-world jobs.  They have only milked the gubmint and therefore, truly do not know "giddy-up" from "sic-em".

 

With the current administration of major screwups ruining this country, we will achieve third world status by 2016!!!!!

Sep 27, 2013 5:49AM
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People are herd animals and panic and charge and only investors may profit, or benefit.
Sep 27, 2013 5:37AM
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People put buying nice cars, furniture, TV's, electronic devices before a house.  I bought my house first, paid for it, and then had the money to buy all those other things.  Nothing wrong with an old car, a hand me down TV, used furniture, and a plain cell phone.
Sep 27, 2013 5:24AM
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IF our Govt can't pay their bills,or balance their checkbook why should anyone else?  Oh, I get it, there are two sets of rules. 
Sep 27, 2013 4:52AM
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I've been living in my home 16 1/2 years, its value today is the same as the day it was purchased.  Actually, if it were sold on todays market we would lose due to closing costs, sales commission etc.
Sep 27, 2013 4:43AM
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Looking to the future -- owning a home may not be possible for most "middle class" (or what's left of the middle class) people. Big investors are buying up homes in many areas of the country to use as rentals. Most people in the area where I live could never afford a respectable down payment. Others are hanging by a thread with zero equity in homes they have been in for years. Things sure don't look good for future generations.

Sep 27, 2013 4:41AM
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AIG and many investors are in the rental game now and the screwing continues until people become insolvent at a record pace as wages go down and prices increase. Many bought houses with mortgage payment the same as rental one, but the terms were artificial and promises were made. Be careful as the Banks and Wall Street are gearing up to play the game again on the back of taxpayers. 
Sep 27, 2013 4:32AM
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 "The CRA didn’t cause the crisis. In recent years, some critics have argued that the Community Reinvestment Act, a 1977 federal law designed to ensure banks were serving poor neighborhoods, was partly responsible for the mortgage crisis"

And despite the Feds trying to whitewash the issue with 'Cherry-picked' data, this is probably still the truth.

But it appears that the quality of new loans is much better than when they were writing NINJA loans (No Income No Job or Assets) aka 'Liar Loans'.
Sep 27, 2013 4:30AM
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The current housing market is a PRIME EXAMPLE of why the government needs to stay out of private industry and business. Everything they touch gets flipped up.
Sep 27, 2013 4:14AM
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10 takeaways on mortgages after the housing bust

9 -  Its still a terrible time to obtain some front loaded interest debt on a stagnate asset that you purchase at the top of the market. The current mortgage structure worked when median home prices were less than 100K but are totally jacked now that homes are 200K - up.  

10 - Homes no longer have room to go upward with the median incomes stuck in reverse. Every year that passes with incomes shrinking that home you just purchased gets a little less affordable to more & more Americans. 

There is a need in America for a new mortgage option...One that favors the borrower more with incentives to stay & pay. Home flippers that buy today and sell tomorrow should not get the same terms as someone looking to build a life in that home. I suggest 10 year,15 year & 20 year incentives such as rate reductions,cash back or principal reductions for being loyal to that loan.
Sep 25, 2013 1:00PM
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I really believe that you should not exceed a debt of 3x the lower income worker.  My husband and I bought a house that was 1.5 times or income and one times joint income of debt.  At that time it was 2.5 times my income.   It was a good thing we he got downsized and we had to go with self insured which is much more expensive if you are older than cobra.    It was tight but we made it.  He had worked there 25 years so that qualified as stable.  
Sep 24, 2013 10:27PM
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The decision to buy a home is really a very personal and individual issue.  There are financial parameters that it would be wise to consider, but again, people are different.  Some people choose to buy a home with a debt to income ratio of 51%.  That's really high, but none-the-less for some people it's not a problem. 

There were some who commented on what percent of your income you shouldn't exceed when buying a house.  Some said 30% some said 25%.  Anyone can throw out numbers.  But  there are people who would default on a mortgage if it was the only debt that they had.  So I don't know that the debt to income ratio really is as important as some think.  In my opinion what matters most is your credit history and income stability.  If you have a stellar credit report and a solid job then I would pay very little attention to the debt to income ratio.  If a person has demonstrated that they are responsible then I'm inclined to leave the amount of disposable income they should have up to them.  Maybe they just don't go on vacations or out to dinner.  Maybe, just maybe their home is their life.  They stay home, work on it, maintain it, and take care of it.  That's what they like to do.  So the bottom line is that having a favorable debt to income ratio is no guarantee that the person taking out the mortgage will pay it.  It might indicate that they should be able to, but not that they will.

Sep 24, 2013 10:15PM
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as a mortgage broker for 20+ years, and specializing in the FHA programs, the biggest differences between pre and post the mortgage / real estate crisis can be sumerized in several stages.
first all the option arms / negative am's , hight LTV / CLTV subprime and limited doc mortgages ,
got eliminated.  lenders retooled the few programs ( non FHA ) that they offered , to emphisize much lower LTV's ( 80 and below ) , higher ficos ( 720+ ) , and mostly full docs loans but with higher DTI's.
lenders figure that they rather live with REAL income and higher DTI, then continue to close their eyes with the past stated , limited and no doc loans.  regarding FHA programs , them being government insured and regulated , they are the biggest bang for the buck mortgages ( there is regular and jumbos ).  at 96.5 LTV + upto 6% sellers consetion , not fico driven and alternate credit can be used, + all funds can be gifted and very competitive rates.  and if you are a doing a streamline FHA  ( no cash out ) , you don't even need to show any income or asset docs.  and if you need to go the 203K route, the lender will do the same 96.5 LTV + 6% , but not just on the purchase price, but on the price + rehab + upto 6 months of mortgage payments ( for the time rehab is being done ), and the rehab can also be used for C of O changes, mixed use properties , and properties that in theory can be more then legal 4 family dwelings.  thats why the mortgage downturn has been a boom for the FHA's.

Sep 24, 2013 8:24PM
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The CRA indeed caused this mess. Typical MSNBC slant to say it didn't.

 

Their math, or that of their sources is intentionally misleading, please dont fall for it.

 

CRA based loans are NOT performing better than non CRA loans. CRA loans ARE responsible for up to 50% higher default rates, and the subsequent irrational refinancing by said borrowers HAS led to the mortgage meldown.

 

As a primer, please note that when the federal government says (for political purposes) that banks  had better relax their lending standards or else, (as a method of securing homeownership for, and therefore guaranteeing votes from "underrepresented" communities), the banks do it lest they lose FDIC coverage or lose their charters, or Title I status.

 

The resulting apparently good performance from the late 90's to 2007 is misleading , because when refinanced over and over again (house as an ATM), of course the CRA loans would look like better performers.

 

DO the math. Standard default rates from those who are responsible (ie: non CRA borrowers) appear higher....but that is as a percentage of total loans, which are far fewer as an average per borrower. Unfortunately MSNs sources' or their own flawed math divides defaults by total loans, not total borrowers as it should, and does not take into consideration multiple refinances by the same borrower.

 

HERE IS PROOF that CRA borrowers default at a 50% higher rate:

 

If you have 1000 responsible NON-CRA borrowers representing 1500 loans over 10 years because half, or 500 of them refinanced once during that time), if 30  defaulted, that would be a  2% default rate because 30 loans divided by 1500 loans is 2%

 

However, if you take the same number (1000) less responsible CRA borrowers (ie: those who do not meet standard underwriting criteria and more likely to overspend), whose refinance rate is statisticallyy 200% higher (using house as an ATM). As a result, those borrowers represent 3000 total loans over 10 years. If 55 defaulted, the overall default rate would appear lower at 1.8% because 55 defaulted loans divided by 3000 loans is 1.8% 

 

Note however that in both cases, there are 1000 initial borrowers for CRA and NON CRA stats, yet CRA borrowers had a 50% HIGHER DEFAULT RATE (55 borrowers defaulted per 1000 for CRA borrowers vs 30 defaulted per 1000 non CRA borrowers) WHEN YOU DIVIDE DEFAULTS by TOTAL BORROWERS rather than TOTAL LOANS.

 

Sep 24, 2013 8:14PM
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NOTHING IS ANY DIFFERENT IN THE LENDING SYSTEM FOR MORTGAGES. LOW START RATES, ADJUSTABLE RATES TIED TO LIBOR, 100% AND 125% LOANS ARE STILL BEING MADE, LOAN PORTFOLIOS ARE STILL BEING LOADED ONTO THE MEARS PLATFORM AND THE LOANS ARE STILL BEING SOLD TO THE DURATIVES MARKETS.. LOOKS TO ME LIKE THE NEXT MELT DOWN IS BEING STOKED AS WE SPEAK. DON'T BE SURPRISED WHEN IT COMES AROUND. NOTHING HAS CHANGED SINCE THE BEGINNING OF THIS MELT DOWN AND NOTHING WILL BECAUSE IT IS/WAS SO LUCRATIVE FOR THE WALL STREETERS.
Sep 24, 2013 6:20PM
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  Ever wonder how many people leech off of home sales? Than ask did any own or build the house? Never mind you morons back to your enslavement.
Sep 24, 2013 3:59PM
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I will still sit still before trying to refinance because if you check the internet, banks, lenders and whatever else is publized you know that it is still in a mess and I don't want to get caught up in it.  Have 2 secured incomes, pay 54% of those incomes into 2 mortgages; however, as long as I never miss a payment (never have) I will scrap by until I can refinance.  Credit scores don't seem to matter anymore, mine is 813, don't have any debt at all, just the system claims my property is under water.  Yes, I do owe more than they say my property is worth, guess what, you will never get that property, that is what it is all about between the politics, bankers, lenders or loan sharks, they want to take what you own, make it extremely difficult for you to refinance and try and foreclose on you.  The gain here is the rich get richer, not off of my sweat and tears, never going to get my property.  Time will tell if I am making the right move or not, but at least it will be my decision and not some dishonest promises which will lead to foreclosure, not going there
Sep 24, 2013 3:07PM
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Buy a home that makes sense for you, not to be wealthy when you retire. If you buy a home you can afford and can ignore whether it's value goes up or down what difference does it make? If the cost is comparable to what you'd pay to rent you lose nothing if it's paper value drops $10,000.
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