More and more new mortgages are going to riskier borrowers, which is leading to an increase in delinquencies. According to a CNBC report, this is fueling concerns that an eventual spike in defaults could slow or stall the housing recovery. According to the report, the trend is centered around home loans guaranteed by the Federal Housing Administration. It is raising some red flags for Hans Nordby, chief economist of real estate research firm CoStar.
“We have a situation where home prices are high relative to average hourly earnings and we’re pushing 5 percent-down mortgages, and that’s a bad idea.”
The FHA usually requires down payments of 3 percent to 5 percent and are used by first-time buyers. More and more non-bank lenders, which feature more lenient credit standards than banks, are offering these options. The share of FHA mortgage payments that were 30 to 59 days past due averaged 2.19 percent in the fourth quarter, up from about 2.07 percent the previous quarter. This could simply reflect monthly volatility, but it has caught the attention of Sam Khater, CoreLogic’s deputy chief economist.
“The risk is that the performance will continue to deteriorate and then you get foreclosures that put downward pressure on home prices.”
However, the current trends are not at all like the scenarios unfolding a decade ago, when subprime mortgages were approved without verification of buyers’ income or assets, setting off a housing bubble and then a crash. Bill Emerson, vice chairman of Quicken Loans, the nation’s largest non-bank lender, says the credit standards of his firm and his peers are actually stringent by historical standards. He told USA Today that current standards only appear looser today because banks sharply tightened their requirements following the housing crash.
“I don’t have any concerns about a potential increase in delinquencies or defaults. In the last three, four years, consumers have more access to credit….and all of a sudden it’s, ‘Here we go again.’ I don’t believe we’re anywhere close.”