Heading in Wrong Direction: Falling FICOs, Tighter Credit Regs, Expensive LLPAs

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending July 9, 2010. 

The MBA's loan application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a snapshot view of consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment. If consumers are able to reduce their monthly mortgage payment and increase disposable income through refinancing, it can be a positive for the overall economy (creates more consumer spending or allows debtors to pay down personal liabilities like credit cards). A falling trend of purchase applications indicates a decline in home buying demand, a negative for the housing industry and the economy as a whole.

Excerpts From the Release...

The Market Composite Index, a measure of mortgage loan application volume, decreased 2.9 percent on a seasonally adjusted basis from one week earlier. This week's results include an adjustment to account for the Independence Day holiday.  On an unadjusted basis, the Index decreased 12.6 percent compared with the previous week.   The four week moving average for the seasonally adjusted Market Index is up 1.5 percent.

The Refinance Index decreased 2.9 percent from the previous week. The four week moving average is down 2.4 percent for the Refinance Index. The refinance share of mortgage activity remained constant at 78.7 percent of total applications from the previous week.

The seasonally adjusted Purchase Index decreased 3.1 percent from one week earlier.  The unadjusted Purchase Index decreased 12.7 percent compared with the previous week and was 43.0 percent lower than Independence Day week one year ago.   The four week moving average is down 2.4 percent for the seasonally adjusted Purchase Index.

This was the lowest Purchase Index observed in the survey since December 1996...

The average contract interest rate for 30-year fixed-rate mortgages increased to 4.69 percent from 4.68 percent, with points increasing to 0.96 from 0.86 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  The effective rate increased from last week.

The average contract interest rate for 15-year fixed-rate mortgages increased to 4.12 percent from 4.11 percent, with points increasing to 1.04 from 0.93 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.

The average contract interest rate for one-year ARMs remained unchanged at 7.20 percent, with points decreasing to 0.22 from 0.24 (including the origination fee) for 80 percent LTV loans. The adjustable-rate mortgage (ARM) share of activity increased to 5.5 percent from 5.4 percent of total applications from the previous week.

Purchase apps have declined in 9 of the last 10 weeks.  June existing home sales data will get a modest boost as tax credit loans made their way through lender pipelines before the June 30 closing deadline (extended to September 30), but Pending Home Sales will likely fall to new record lows. This is not a shocker to housing market professionals but broader markets may be more sensitive to further weakness in housing data.  I'm not sure we can call it a double dip if we never really escaped the first dip though....

June Existing Home Sales print on July 22, New Home Sales on July 26, Pending Home Sales on August 3.

Mortgage rates are holding near lifetime lows but, regardless of an extended rally in MBS prices, lenders have proven themselves unwilling to move consumer borrowing costs lower than current levels.  This is a factor of how mortgage loans are securitized and traded. READ MORE.

While record low mortgage rates are terrific, do they matter if consumers don't qualify?

From MND's Pipeline Press Channel:

"Figures provided by FICO Inc. show that as of April, 25% of consumers (about 43 million people) now have a credit score of 599 or below, making them a big risks for lenders. This number is up from the historical norm of 15%. At the other end, interestingly, the number of consumers who have a top score of 800 or above has increased in recent years - mostly attributed to them cutting spending and paying down debt.  Consumers on the lowest end of the scale are less likely to try to borrow, i.e., buy a house or refinance"

Sounds like the rich are getting richer while the poor get poorer. The "distribution of wealth" supply chain is clearly clogged!

Below is a table of Fannie Mae's Risk Based Loan Level Price Adjustments. These LLPA's are subtracted from a borrower's loan pricing, which pushes their mortgage rate higher. A borrower with a FICO score between 680-699 takes a 1.50 point hit on their pricing at an 80% loan to value.

If this fee was paid at closing, on a $200,000 loan, it would cost the borrower an additional $3,000 to close! I don't blame the GSE's for adjusting their risk model, but these loan level pricing adjustors will prevent many folks from qualifying for a refinance...either that or they will look to the FHA, which has less restrictive underwriting regs after a "pre-foreclosure event" (3 years!) and far fewer LLPAs, for financing.

What does this mean for the future of housing demand?

Fixing a consumer's credit is not an easy process, nor is it quick. Depending on the make-up of defaults, it can take years to rebuild a credit profile, especially when banks are reluctant to lend. We are heading in opposite directions here! Underwriting guidelines are as tight as they've ever been (I feel for the self-employed) and over 26 million Americans are unemployed or underemployed. Many of the jobs that were lost over the course of the last two years will be lost forever to gains in labor productivity and investments in technology. If the housing recovery is to gain momentum, the mortgage industry needs new products! READ MORE

Plain and Simple: We all need to be looking at the macroeconomic recovery from a long-term perspective.  We must focus on educating our children. We must start building their credit profiles now so they fit into underwriting guidelines when they're ready to buy a home. We must prepare the next generation to carry the torch of the economic recovery.