Amid improving macroeconomic conditions, residential lending continued to increase in 2016, based on the recently released 2016 Home Mortgage Disclosure Act (HMDA) data.1, 2 The number of first-lien loan originations for the purchase of one-to-four unit properties intended for owner occupancy rose to 3.46 million in 2016, a 10% increase from 3.12 million in 2015. Although residential lending has been growing at double-digit rates since 2012, loan originations in 2016 were only at three-fourths of the peak level of 4.83 million in 2005. Lending has not fully recovered due to the interplay of factors relating to the borrower’s capacity to obtain a mortgage, tighter lending standards, and the faster appreciation of housing prices relative to income growth amid a lack of housing supply. An increasing share of originations has gone to high income earners.3
By type of loan, conventional loans accounted for 61%, well below their 90% share in 2005-2006, when loan originations rose to a peak of 4.42 million. FHA-insured loans accounted for 25%, up from 5.5% in 2005, but the level is well below the 40% share in 2009-2010 when FHA increased lending as conventional lending collapsed. FHA’s share to loan originations has declined in part because of the increase in upfront and annual mortgage insurance premiums and the change in duration of payment of premiums to the full term of the loan for loans that have more than 90% loan-to-value ratios.4 Meanwhile, VA-guaranteed and RHS/FSA-guaranteed loan originations have generally continued to increase since 2004, except in 2005-2007 when the number of loans decreased slightly. VA-guaranteed loans accounted for 10% of originations, while RHS/FSA accounted for 3%.
Low-to-Middle Income Borrowers Were More Likely Obtain FHA and FSA/RHS-Insured Loans, While High-Income Borrowers Were More Likely to Obtain Conventional and VA-Guaranteed Loans
Residential lending has not fully recovered to pre-crash levels due to the interplay of demand (borrower) and supply (lender) factors. On the borrower side, the fast pace of house prices relative to income growth may be one factor. As of July 2017, the median sales price of existing homes sold has increased by 68% since 2012 compared to 15% growth in median family income. On the lender side, tighter lending standards (loan-to-value, debt-to-income, credit scores) have also made obtaining a mortgage more difficult or costly, especially for low to middle-income households/earners. The chart below shows that shows that applicants whose gross annual incomes are “high” (relative to the U.S. median household income of $59,039 in 20165) were likely to obtain a conventional loan: the median applicant income on approved conventional loans in 2016 was $90,783 and the median applicant income on approved VA-guaranteed loans was $74,863. Applicants with incomes that were in the range of the U.S. household median income were more likely to obtain an FHA-insured and FSA/RHS loans: the median applicant income on FHA-insured loans was $60,007 and the median applicant income on approved FSA/RHS loans was $47,211.
Although applicants with lower incomes were more likely to obtain an FHA-insured loan, the median loan amount was also small, at $179,172. Conventional and VA-guaranteed originated loan amounts were typically larger, but borrowers typically had higher incomes and were more likely to put in larger downpayment, as suggested by the lower loan-to-income ratios on conventional loans.
The share of loan originations going to “high” income applicants (applicant income is 80% to 120% of the median metropolitan area income where the census tract of the property is located) has been steadily rising. As of 2016, 46% of loan originations went to applicants whose incomes were above 120% of the metropolitan area median income, up from 35% in 2009.
Amid rising home prices, jumbo loans —loans that exceed the loan limits that the government sponsored enterprises (Fannie Mae and Freddie Mac)— rose to nine percent of originations6, higher than the 4.3% share in 2004.
Not Meeting Debt to Income Limit is Major Reason for Denial
HMDA does not collect data on credit scores, loan-to-value, and debt-to-income on individual applicants, so an evaluation of why applicants with incomes higher than the household income were denied is difficult to assess. However, HMDA allows the lender to provide up to three reasons for the denial (in no order of preference). Based on the first reason listed (which may be deemed to be a random sample of the denial reasons), not meeting the debt-to-income (DTI) ratio was the major reason provided by lenders why applicants were denied (29%), followed by credit history (22%) and insufficient collateral or downpayment (15%). Not meeting the debt-to-income ratio was the major reason applications were denied across all loan types. (In this regard, Fannie Mae’s decision in July 2017 to increase its back-end DTI ratio limit from 45% to 50% is a positive move to ease the constraints for mortgage borrowers with 50% DTI whose risk profile is not significantly different from the risk profile of borrowers with 45% DTI.)
Rising House Prices, Lack of Downpayment, and Weak Credit Profiles Made Homes Less Affordable
For middle-income borrowers, an FHA loan is the best option (i.e., the borrower is more likely to get approved), but the faster appreciation of home prices relative to income growth has increasingly made a home purchase less affordable. Since 2012, house prices have increased by 68%, while incomes have increased by 15%.
Low downpayment conventional loans are available, but middle-income earners may be hard pressed to meet the downpayment on a bigger loan. Moreover, borrowers with less than sterling credit profiles and with little downpament bear additional costs associated with a higher mortgage rate that government-sponsored enterprises (Fannie Mae and Freddie Mac) charge to reflect the higher borrower risk (called loan level price adjustments, which reduce lender’s fees).7 For example, Fannie Mae assess an LLPA of 1.5% of the loan ($1,500 on a $100,000 loan) on a loan it will purchase from a lender where the a borrower has a 680 FICO score and a loan with a 95 loan-to-value ratio (or 5% downpayment), The LLPA rises to 3.5% ($3,750) for borrowers with less than 620 FICO score. LLPAs increase the mortgage rate charged to borrowers because lenders make up for the reduction in fees arising from the LLPA by increasing the mortgage rate charged to the borrower.
In summary, the latest 2016 Home Mortgage Disclosure Act data indicates that residential lending has been growing at double-digit rates since 2012. However, loan originations remain below 2005 levels for reasons related to the interplay of borrower’s income and credit profiles, tighter lending standards, and rising home prices due to inadequate supply. For these reasons, an increasing share of originations8 has gone to high income earners.
1 The author thanks Hua Zhong, Data Scientist, for writing the code that greatly facilitated the tabulation of the HMDA data.
2 The Home Mortgage Disclosure Act (HMDA) was enacted by Congress in 1975 and was implemented by the Federal Reserve Board's Regulation C. On July 21, 2011, the rule-writing authority of Regulation C was transferred to the Consumer Financial Protection Bureau (CFPB). Regulation C requires lending institutions to report public loan data. Federally-insured banks, savings institutions, credit unions, and non-depository mortgage financial institutions that meet Regulation C requirements for asset size, presence in a metropolitan area, number of originations, and whose loans are intended for sale to the GSEs, are required to report their lending transactions. In 2016, there were 16.3 million HMDA records from 6,762 financial institutions. According to FDIC, there were 9,498 FDIC-insured and FIDC-supervised institutions as of June 2017. See https://www.ffiec.gov/hmda/, https://www.ffiec.gov/hmda/pdf/2013guide.pdf, https://www.fdic.gov/bank/statistical/stats/
3 First-lien, one-to-four family, owner occupied, home purchase originated
4 The annual mortgage insurance premium increased from 0.55% of the loan amount to 1.35% of the loan amount from 2010 to 2013 and it was reduced to 0.85% for most borrowers in 2015 (loans less than or equal to $625,500 and greater than 95% LTV). The upfront mortgage insurance premium was increased from 1.75%, to 2.25%, then 1.0% in 2010 and then raised to 1.75% in 2012. Starting with cases in June 3, 2013, loans with more than 90% LTV are charged the annual MIP for the term of the loan. See https://www.fha.com/fha_requirements_mortgage_insurance.
5 U.S. Census Bureau, 2016 Annual Social and Economic Supplement of the Current Population Survey.
6 Again, first-lien, one-to-four family, home purchase, owner occupied.
7 LLPAs as not added directly to the mortgage rate. Rather, the LLPAs are deducted from the lender’s fees (e.g., fees for underwriting, appraisal, recording)) when they sell the loan to the GSEs. Lenders recover the reduction in fees by charging the borrower a higher mortgage rate.
8 First-lien, one-to-four family, owner occupied, home purchase originated