What is the main difference that you see in the industry this year, compared to previous years? Underwriting standards have tightened and lenders are requiring borrowers have a substantial down payment and good credit in order to be accepted for a loan either for a home purchase or a refinance. We are living in a fully documented world. A few years ago, most lenders were streamlining the process as much as possible, trying to eliminate much of the paper involved. Today, borrowers should expect to completely document their income and assets, and re-verify these data as their application moves through the process. Furthermore, the industry has moved away from mortgage products, in particular loans to subprime borrowers, low-doc loans and option ARMs that experienced extremely high loss rates during the crisis. New legislation and regulation will likely keep these products from re-entering the market in future years.
What changes do you expect to remain a part of our industry, and what do you think will fall to the wayside? It is unlikely that the industry would return to stated income or no doc lending. However, I expect that the industry will again be interested in improving the efficiency of the process, and lowering costs, particularly as origination volume decreases. This could lead to more streamlined processes over time. Also, it appears that the market for jumbo loans is returning, with some ability to securitize these loans as well.
Are there any aspects of the industry that you think are gone for good? Yes, borrowers will be required to have “skin in the game” in the form of a substantial down payment. It has been repeatedly shown that borrowers without equity in their property are much more likely to default.
Regarding Chicagoland, would you say the worst is behind us? We think the most likely scenario is that the national economy will continue to grow, and the job and housing markets will continue their gradual recovery over the next few years. The Chicago area seems to be tracking national trends, with home prices stabilizing and the unemployment rate falling. However, there is certainly a significant risk that the national economy, and Chicago with it, could fall into a “double dip” recession. It’s not the most likely outcome, but it is a risk.
Are there any industry innovations born of these economic times? Interest rates have been historically low throughout the spring buying season, so there have been good deals available for qualified borrowers. In particular, first-time homebuyers who may have been priced out of the market a couple years ago have been able to take advantage of the low rates and lower home prices. In addition, many borrowers have been able to refinance into a lower monthly payment or refinance out of an adjustable rate mortgage and into a fixed rate mortgage product.
How will we know that we have “recovered”? The key to the recovery will be jobs. Buyers are not going to return to the market until they feel confident that they will be able to sustain homeownership. Mortgages typically cannot be paid without a steady income, so the recovery of the housing market will follow the decline in unemployment.
Michael Fratantoni is the Vice President of Research and Economics For the Mortgage Bankers Association (MBA). He is responsible for managing MBA’s policy development research for issues impacting single-family lending. He can be reached at 202.557.2700.