Is 2019 better equipped for the next mortgage Market Downturn?
Or are we facing another mortgage failure?
The mortgage market has shifted dramatically since 2008. Improvements in underwriting, technology, and quality controls – some visible, some less so – have resulted in a fundamentally sounder mortgage system than before the crisis of 2008. Lenders have strengthened their mortgage origination processes, including improved underwriting and collateral assessment. Additionally, appropriate regulations, such as the ability-to-repay and qualified mortgage rules, have formed guardrails for mortgage lending standards that did not exist 10 years ago.
These are all good things that make our housing market have a stronger base than it did in 2008 and will help keep us from having another mortgage failure.
Better Products
The mortgage system today is safer and sounder due to changes in credit eligibility standards following the crisis. Fannie Mae, one of the primary providers of market liquidity for mortgages, no longer purchases newly originated low- or no-credit documentation, negatively amortizing, or interest-only single-family loans, nor single-family loans with prepayment penalties or balloon payment features. These standards help to foster sustainable home ownership while continuing to provide opportunities for creditworthy borrowers to obtain financing and become homeowners.
Better Credit
Key measures of creditworthiness of Fannie Mae-purchased loans today are significantly stronger than they were in the period leading up to the crisis, from 2004 to 2007. FICO is a measure of credit history, which is the strongest predictor of mortgage delinquency. The average FICO credit score of borrowers with mortgages delivered to Fannie Mae in the second quarter of 2018 was 743. The average FICO credit score of our 2004 to 2007 acquisitions was 717. While FICO comparisons between the two periods can be difficult due to underlying changes in FICO in the last decade, the general creditworthiness of today’s borrowers is better than that of 2004-2007. Further, as of June 30, 2018, 91 percent of Fannie Mae’s single-family conventional guaranty book of business consisted of loans that were originated after the 2008 crisis.
In 2018, some market observers have noted the recent increase in loan-to-value ratios for new mortgages. This shift is related to the changing demand for mortgage loans back to an understandable (and predictable) cycle. Today, most consumers are obtaining loans to purchase a home rather than loans for refinance. “Purchase mortgages” typically have higher loan balances relative to a home’s value (what we call a loan-to-value ratio) than refinance loans. Purchase loans made up 65 percent of the mortgages acquired by Fannie Mae in the second quarter of 2018. The last time that percentage was similar was in 2000, more than 17 years ago.
Better Process
In 2018, the mortgage underwriting process itself has evolved into a fundamentally healthier one for both borrowers and lenders. Today, mortgage lenders have powerful new tools available to help them understand and assess credit and collateral risk. The amount and quality of data in each loan application and appraisal is better than ever before, and cutting-edge analytics help lenders identify and understand potential issues with a loan before it is closed – not after.
For instance, Fannie Mae’s Desktop Underwriter® (DU®) risk assessment system is highly predictive of performance. Recent innovations such as the Day 1 Certainty® electronic data validation tools use verified source data to mitigate manual errors and potential fraud. The Day 1 Certainty enhancements enable lenders to access and immediately incorporate a borrower’s verified asset, income, and/or employment data into DU’s comprehensive risk assessment.
Another example is appraisal risk assessment tools such as Fannie Mae’s Collateral Underwriter®(CU®), which enables instant validation of appraisal quality and value to an extent unimaginable in 2008. CU has eliminated millions of arguments between appraisal reviewers and appraisers about whether or not the estimate of property value is adequately supported by the particular comparable sales chosen by the appraiser. Today, all appraisals are electronically submitted by the lender. When CU analyzes an appraisal, it instantly provides real-time feedback to the lender, and accepts the appraised value on the spot if the CU risk score meets our criteria. Most of the appraisals supporting loans delivered to Fannie Mae in the first half of 2018 received this instant validation of the appraised value, driven by significant enhancements in data and increased analytics on appraisal quality.
This “data over documents” approach has improved the quality of the data lenders use to underwrite loans and evaluate the properties used as collateral. Those who remember the last crisis know how important this is, because poor (or fraudulent) borrower and property data was a key feature of the disaster.