Here’s one that might have you scratching your head. According to a recent FHFA report, mortgages made to first-time homebuyers tend to perform worse than those made to repeat buyers. That would seem to indicate that first-time homebuyers are riskier than established homebuyers. Fannie Mae doesn’t agree (FHFA View).
Fannie says it’s like comparing apples to oranges. Although they’re both fruit, they’re different.
First-time buyers are usually younger, less experienced in credit and finances, with lower income. Accordingly, they are less likely to withstand certain financial stress which could lead to defaults. Again, this seems to indicate they are more risky. Fannie still says, “Not so.”
Their position is that once these factors are removed the first time homebuyer loans perform the same as the loans made to the established buyers. Say what? That’s like saying that once you factor out the points scored by all the players the Cavaliers and Warriors both fared the same in the NBA championship. I know, a little radical but I think you get my point.
The end result is that first-time homebuyers do present more of a risk in mortgage lending. These buyers require careful analysis to ensure they not only can qualify for the mortgage but that they can also afford to maintain the home.
Many first time home buyers go in with very little or no reserves for emergencies which may arise after purchase nor with any real experience in dealing with such emergencies. This leaves them more susceptible to potential default.
This is not to say that lenders should not lend to first-time buyers, but to highlight the risks involved and ensure appropriate review and action is taken when completing the process.
Lately, all the buzz has been about regulatory compliance. That’s half the battle. The other half is about loan quality. It doesn’t do a lender any good to produce a legally compliant loan that ends up in default because the borrower couldn’t afford the home. I think Fannie might agree with that.
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Take the time to perform the due diligence needed to create a compliant, quality mortgage loan; whether to a first time or repeat homebuyer. On that, I think everyone would agree.