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Everyone knows that we need first time homebuyers in the market so we can continue the stream of move up homebuyers. This usually signifies how the economy and the housing markets are faring. The better the economy, the better jobs and wage growth, the more likely consumers will be in a better position to buy their first home or move up to a new one. Better for everyone!
According to AEI’s International Center on Housing Risk, 58.8% percent of the loans made for the purchase of a primary home in April that carry an agency (Fannie/Freddie) guarantee were made to first time homebuyers. Sounds good, the agencies are helping more first time homebuyers who help the market, Right?
However, according to the same study, 15.8% of these loans would default given the same circumstances that resulted in the housing market catastrophe of 2007-08. Not so good…
These loans have higher LTVs, and lower credit scores than the loans being made to repeat homebuyers. According to AEI, more than 54% of the loans made to first time buyers in April were considered to be high risk. That’s an increase from 52.6% last year. Are things headed in the wrong direction?
In a push to get financing to more first time homebuyers, are we placing too much risk on the agencies?
Couple this risk with the increasing risk to the FHA insurance fund. FHA is the main source of financing for most first time and low to moderate income homebuyers. If 54% of the first time home buyer loans guaranteed by the agencies are considered high risk, what might the percentage of such loans be for the loans insured by FHA?
First time homebuyers are always needed to keep the housing cycle going. First time homebuyers usually put down less money, leaving them less of a cushion in the event of default. Even a slight hic-cup in the economy, a short term lay off, or an unexpected emergency could throw these buyers into default.
It’s great to develop more programs to help finance first time, and low to moderate income, homebuyers. First time homebuyers, along with repeat buyers, deserve their shot at the American Dream. But it’s no good if that dream turns into a nightmare. A night mare that can ruin their chances of ever owning a home again and one that can have severe adverse impact on these lending programs in the future.
The agencies and lenders can’t do it alone. The economy needs to help. That’s something they cannot control. What lenders can control is their lending to qualified homebuyers at every level. It’s time to lend responsibly with an eye toward the future. The future of the homebuyers and the industry.
Don’t trade our tomorrows for a short term fix today.
