Need to Know: Here’s the loophole that makes the U.S. housing market more wobbly than it appears

by | Jul 6, 2022 | Stock Market

This housing market, it would appear, isn’t built on the same creaky foundations of the subprime crisis. Consider these statistics from Fannie Mae
FNMA,
+0.88%,
the U.S. government-backed buyer of home mortgages. The weighted average FICO credit score in the first quarter for a single family home was a sterling 748. The origination loan to value was 71%, and there were just 4% of homes with a loan to value above 95%. The percentage of buyers with a debt-to-income ratio above 43% — typically the point where lenders get skittish — was 29%.

That doesn’t like the days of no income, no jobs, no assets. But it ignores the surge in house prices. An anonymous blogger named SoldAtTheTop went through house prices in Boston, as an example. The blogger calculated home values as if they continued on the trend from the eight years prior to 2019. What the author found is if prices reverted to a more normal trend, the average loan to value on a sample of jumbo loans that were tracked surges to 92% from about 70%. Jumbo mortgages are too large in size to be backed by Fannie Mae or Freddie Mac, and last year, securitizations of them rose to a 14-year high, according to CoreLogic. “The loophole in the lending standards for this cycle appears to have been that home appraisals were either unable to accurately account for the outlandish price appreciation occurring in the market or were simply roundly ignored given the fact that borrowers came to the table with 20%-30% down-payments and had good credit histories,” the author writes. “I suspect that my small sample is clearly demonstrating something important about the housing …

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