Housing: Part 282 - Borrower characteristics

The Urban Institute does some great work on housing markets.  Here is a link to their monthly housing update, which is full of great information.

These are old points that I have made before, but looking at the charts in the report, I think they may be worth repeating.

First, here is a chart of mortgages outstanding, by type.  What is important to note here is that Ginnie Mae is basically the public conduit for subprime mortgages.  A decent estimate of the size of the subprime market is the combined total of private subprime mortgages and Ginnie Mae (FHA) mortgages.  When we look back at the boom period, that category of total subprime was surprisingly level.  Adding private subprime and FHA together, there wasn't much growth.  The rise in private subprime basically came at the expense of FHA volume.

Source

One of the responses to the crisis that I think is backwards is the idea that public mortgage conduits added to the amount of risk that was taken.  On the contrary, public conduits behaved counter-cyclically during the boom - especially FHA/Ginnie Mae.  It would have been preferable for FHA to have been more aggressive during the boom.  The privately securitized loans tended to have terms that added systematic risk to the market - loans that were set up to be frequently refinanced, MBS packages that didn't have public credit guarantees, etc.  There isn't any question that if those loans had remained in the Ginnie Mae conduit instead of the private markets that developed, the bust would have been less disruptive.

The correct lesson from the boom is that FHA and the GSEs should have been making more loans in 2004-2007.

Since the growth wasn't coming from subprime, where was it coming from?  It came from the sharp rise in Alt-A loans, which were being utilized by households with high incomes and the ability to pay, who lived in housing constrained cities where housing expenses are very high.

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Here is another graph from the report.  It appears that working class/entry level housing markets have been showing some strength recently.  Prices in low tier markets seem to be rising at a slightly higher rate than in high tier markets.  I would expect this to be reflected in credit markets, but mortgage growth remains low.  And, according to the Urban Institute data, it doesn't look like there has been much of a retreat in FICO scores of average buyers.  DTI levels have risen recently, though.  So, recent market moves seem to be coming from improved sentiment from highly qualified borrowers, who are willing to take on more debt in order to purchase.  Maybe this is related to the continuing reversal of negative equity, and some qualified households who have been stuck in homes with negative or negligible equity are now escaping those homes, and taking out mortgages reflecting the high LTV they have been stuck with in homes that continue to be priced too low because of public credit policies.

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One additional random tidbit:  One of the pieces of evidence regarding lending excess during the boom is that credit spreads were low.  But, if those spreads are measured as the difference between risky mortgages and conventional mortgages, really those spreads are a reflection of the lack of aggressive lending at the FHA and GSEs.

Here is a graph comparing 30 year conventional mortgage rates to the 10 year treasury rate.  This has bee relatively high since the 1990s.  Remember that the GSEs were under pressure in 2003 and 2004.  And, as shown above, FHA was in retreat throughout the boom.  Spreads between GSE loans and jumbo loans were low during the boom also.  This is because it was GSE rates that were unusually high.  That remains the case today.  Today, rates remain high largely because of guarantee fees.  The UI report notes that guarantee fees at the GSEs remain very high - more than 50 basis points, which is double what they normally would be.  This is a primary source of very high profits at the GSEs.  Banks should be raking in market share under these conditions, but they face pressure from the CFPB.

Especially considering the lack of significant pre-payment risk at current rates, mortgage spreads should be much lower than they are.  High guarantee fees and high spreads are a political outcome, not a market outcome.  If they were a market outcome, the outcry about greedy bankers would be deafening.  Since they are a political outcome, those profits get pocketed by lenders and the GSEs while activists and pundits nod in support of our wisdom and prudence.