By Laura Kusisto and Christina Rexrode
More Americans are stretching to buy homes, the latest sign that
rising prices are making homeownership more difficult for a broad
swath of potential buyers.
Roughly one in five conventional mortgage loans made this winter
went to borrowers spending more than 45% of their monthly incomes
on their mortgage payment and other debts, the highest proportion
since the housing crisis, according to new data from mortgage-data
tracker CoreLogic Inc. That was almost triple the proportion of
such loans made in 2016 and the first half of 2017, CoreLogic
said.
Economists said rising debt levels are a symptom of a market in
which home prices are rising sharply in relation to incomes, driven
in part by a historic lack of supply that is forcing prices
higher.
Real-estate agents worry that buyers' weariness from being
priced out of the market could make this one of the weakest spring
selling seasons in recent years.
Consumers are growing more optimistic about the economy and
their personal financial prospects but less hopeful that now is the
right time to buy a home, according to results of a survey released
in late March by the National Association of Realtors.
At the same time, the average rate for a 30-year, fixed-rate
mortgage has risen to 4.40% as of last week from 3.95% at the
beginning of the year, according to Freddie Mac, putting still more
pressure on affordability.
These factors "are working against affordability and that's why
you get the pressure to ease credit standards," said Doug Duncan,
chief economist at Fannie Mae. He said that pressure has to be
balanced against the potential toll if underqualified buyers
eventually default on their mortgages.
CoreLogic studied home-purchase loans that generally meet
standards set by Fannie Mae and Freddie Mac, the federally
sponsored providers of 30-year mortgage financing.
The amount of these loans packaged and sold by Fannie and
Freddie increased 73% in the second half of 2017, compared with the
first half of the year, according to Inside Mortgage Finance, an
industry research group. In that same period, overall new mortgages
rose 15%.
Fannie Mae and Freddie Mac have been experimenting with how to
make homeownership more affordable, including backing loans made by
lenders who agree to help pay down a buyer's student debt or making
it easier for self-employed borrowers to get mortgages. Several
years ago, Fannie and Freddie started guaranteeing loans with down
payments as low as 3%.
Sohani Rao, a software engineer in the San Francisco Bay Area,
tried to buy a home for about a year but finally gave up a few
months ago. Dozens of prospective buyers would show up for open
houses, she said, even for homes in poor condition, resulting in
bidding wars that put them out of her price range. Ms. Rao said
loosening lending standards would only create more bidders.
"Thing are so bad right now," she said. "By doing this, they
might have even made the problem worse."
Debt-to-income ratios measure the share of a household's pretax
income that goes to paying a potential mortgage, plus credit card
payments, student loans and other debt. Borrowers who find
themselves saddled with too much debt might struggle to make their
monthly mortgage payment or save for major repairs or other
emergencies.
Todd Jones, president of BBMC Mortgage, said he is wary of
making loans to borrowers whose debt-to-income levels would rise
above 45% as a result, because they could find themselves
stretched. "Every month is going to be tight," he said.
Last summer, Fannie Mae moved to back more loans made to
borrowers with debt-to-income ratios of up to 50%, up from a
typical limit of 45%. Freddie Mac also started backing more of
those loans, according to industry researchers.
Fannie's new policy has resulted in 100,000 new mortgages that
otherwise wouldn't have been made last year and early this year,
according to the Urban Institute, a nonpartisan research
organization.
Caliber Home Loans, a Texas-based lender, said 25% of its funded
loans have debt-to-income ratios of greater than 45%, up from 10%
about a year ago.
Economists warn that lenders must tread carefully in making
credit more available, given the role easy mortgages played in
creating the last housing bubble. The share of new buyers with
debt-to-income levels in the 46% to 50% range remains well below
the peak of just under 37% registered in 2007, but is nearing the
levels of 2004-05, the years leading up to the bubble, CoreLogic
data show.
So far lenders are making most of these loans to borrowers who
have a history of good credit, though that could change. In the
fourth quarter of last year, about 78% of the loans with
debt-to-income ratios above 45% were made to borrowers with credit
scores of 700 or more, according to Inside Mortgage Finance.
Although standards vary by lender, usually any borrower below 650
is considered subprime.
"The problem," said Guy Cecala, chief executive of Inside
Mortgage Finance, "is you're going to run out of [prime]
borrowers."
The Urban Institute found that the share of borrowers with
Fannie Mae-backed mortgages who had high debt-to-income ratios and
had credit scores below 700 jumped to nearly 25% in the first two
months of this year from 19% a year earlier.
"It's not a problem today, but it may be a problem tomorrow,"
said Stan Middleman, chief executive of Freedom Mortgage, a home
lender.
Write to Laura Kusisto at laura.kusisto@wsj.com and Christina
Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
April 10, 2018 06:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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