NEW YORK--(BUSINESS WIRE)--A confluence of events could bolster the U.S. housing market, especially for entry-level buyers, according to Fitch Ratings. None of the actions as currently disclosed will independently push the needle for housing, but cumulatively, they could have a relatively meaningful impact on home buyer psychology, pent-up demand and housing trends in 2015 and beyond.
During the past few months the government has begun the process of loosening credit qualification standards targeted to entry-level, often first-time homebuyers. The government has also begun to address lender concerns about loan put-back risks and a key Dodd-Frank issue/risk that might have curtailed residential lending. In addition, oil prices and, consequently, fuel prices have come down sharply, increasing consumer discretionary income and making outlying suburban markets potentially more affordable for home buyers.
The Federal Housing Administration (FHA) announced last week that it would be reducing the mortgage insurance premiums it requires by 0.5 percentage points to 0.85%. The FHA also charges borrowers an upfront fee of 1.75% of the loan balance, and it requires a minimum down payment of 3.5% for new purchase loans. Because of financial pressures the FHA has suffered in recent years, the agency had steadily increased premiums, making its insured loans less attractive to potential home buyers. (The FHA's share of the new housing finance market though the third quarter of 2014 dropped to 11.9% from 15.6% for all of 2013 and 20.4% in 2012.)
This past fall, the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, announced plans to lower the minimum down payment requirements for loans Fannie Mae and Freddie Mac back for certain home buyers to 3% from 5%.
The FHFA also further relaxed rep and warrant risk for mortgage originators. Lenders have put in place more strict credit overlays than the GSE minimum requirement primarily due to GSE put-back risk. These new guidelines are targeted toward addressing this put-back risk and better defining what establishes fraud or misrepresentation.
These changes are likely to be a near-term positive for mortgage underwriting and agency MBS securitization, though it is too early to say whether the changes will provide the explicit clarity on how lenders can protect themselves from put-back risk.
Also in October 2014, regulators, including the FHFA, Comptroller of the Currency, the Federal Reserve and SEC, finalized the Dodd-Frank rule relating to the mortgage market. The new regulations are targeted to strengthen the market for bonds that are backed with mortgages and other loans. The original legislation required banks to hold on to a small portion of the loans they sold. However, there was an exemption that lenders need not retain mortgages that had a low risk of default. Regulators were tasked to define a low-risk mortgage, and in the initial draft of the risk retention rule, the regulators said that such a loan would, among other things, have a down payment of at least 20%. Mortgage bankers and consumer groups complained this could restrict credit, so the down payment requirement was left out of the new rules.
Importantly, oil prices have decreased to five-year lows amidst a worldwide oversupply. That could present a problem for the oil belt, if it lasts, but for the country as a whole this translates into increased discretionary income, making longer commuting distances more practical for buyers looking for affordable housing.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.