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With times being a little tough for many lenders, I hate to bring up anything negative about potentials for increased lending, but I will.
Although there is a shortage of homes in the range that would be considered as affordable, there is currently quite a bit of activity from first-time homebuyers resulting from the many low down payment programs and the easing of credit standards.
According to the National Mortgage Risk Index, the number of new first-time homebuyers increased in February YOY by 7%, that being the 30th consecutive month of growth.
In fact, for last 28 months, first-time homebuyers outpaced repeat buyers. FHA reported that 60% of the loans they insured in February were made for first-time buyers. That’s a whole lotta first-time buyer activity in a rising home value environment.
The challenge is with home prices increasing and new buyers having less money to put down, the rate of outstanding mortgage debt to these home buyers is ever increasing. Today it is reported that the median amount of a down payment made by a first-time buyer is only about 3.5%, the FHA minimum requirement. Very little skin in a very important game.
So, although more buyers are entering the market providing more lending opportunity, they do so at an increased risk.
It may be okay for some millennial buyers who have established a good job and income (maybe two incomes), who are just a little short on down payment money. Great, we can get these buyers into their new home and they can afford the higher monthly payments.
But, what about the low to moderate income first-time buyer who now needs to stretch a little further to meet the higher monthly mortgage obligation, plus the costs for the upkeep of their new home? With eased credit standards and increased allowable debt to income ratios, many of these borrowers may appear to qualify, but do they really?
Fannie recently announced they may qualify borrowers at DTI’s of up to 50%. That means that potentially a borrower may use half of their gross monthly income, not their net disposable income, toward their monthly mortgage payment. Sure, doesn’t leave them much for anything else, yet alone reserves for future unseen problems.
Can we be creating a whole new generation of homeowners who are living on the edge, just one slight problem away from default and a loss of their home?
We need to tread very carefully my friends. It’s good to create programs that offer more consumers their shot at the American Dream.
These must be administered very carefully to promote continued homeownership, not a short term path toward loan failures. We’ve been down that path and it’s one we do not want to travel again.
Lend carefully, my friends…and be sure to carefully monitor your loan quality and performance. Let’s not wait until it’s too late.
