In its recently released January MarketPulse report, real estate industry analysis firm CoreLogic evaluated which factors most prominently shaped the mortgage financing landscape in 2013, and what consumers can expect in terms of credit availability in 2014.
CoreLogic economists came to a number of conclusions in the report, titled "In Which Dimension is Credit Constrained? Comparing Multiple Credit Measures to Normal." Most notably, chief economist Mark Fleming focused on how recent waves of regulation and changes associated with the Qualified Mortgage rule will make for another transitional year within the mortgage finance industry. With mortgage rates expected to continue their gradual rise and the demand for refinance loans dwindling, Fleming asserted that the mortgage market as a whole will shrink, meaning changes to credit availability could be afoot.
Adjusting to a new lending landscape
The market changed in 2013, without a doubt, and it will continue to undergo a facelift in 2014. Cash sales of homes were down considerably from their 2011 mid-recession peak, when a national market still littered with foreclosures offered plenty of opportunity for large-scale or institutional investors seeking out deals. Credit remained tight for low-score borrowers as well as those who don't fully document their loans and those seeking an adjustable-rate mortgage, as lenders large and small adhere to strict standards for risk assessment and loss mitigation while trying to offer a diverse range of products.
Yet determining whether credit availability is higher or lower than it should be is a relative exercise, since the metrics used for gauging it are based on unique outside factors, each subject to their own fluctuation.
"Whether credit is too tight or too loose is an especially difficult question to answer because no one single measure of credit availability exists," wrote Fleming. "Nonetheless it is possible to look at a variety of metrics that collectively influence a borrower's access to credit: borrower credit worthiness, loan-to-value (LTV) ratios; debt-to-income (DTI) ratios, the level of documentation, the propensity of adjustable rate (ARM) loans and the share of purchase-money loans."
Determining what constitutes "normal" availability, Fleming explained, is especially difficult. For example, in October 2013 the average credit score of all originated first-lien purchase loans was 749. But in February 2004, before the Federal Reserve began encouraging the use of adjustable-rate mortgages, thus raising the federal funds rate, the average score for such loans was 710. That 5 percent difference in scores is not particularly significant, according to Fleming, but marked differences in lending approaches have been exhibited when it comes to credit availability for those with the lowest scores.
"Credit to borrowers with low FICO scores was normally available before the beginning of the housing boom, as marked by the Fed announcement, but clearly is not available currently," noted Fleming. "For each measure of credit availability, it is much more insightful to compare the share of the riskiest subset of the entire measure's distribution to that same share before the housing bubble."
By that metric, Fleming went on to explain, high-LTV and high-DTI lending are each relatively close to normal. Both measures expanded availability during the housing boom, reduced it accordingly after the bubble burst and are now returning to something of a middle ground. The share of ARM loans originated, however, is much more restricted than it was prior to the recession, as most of the previously available subprime ARM loan products are no longer being offered.
Home and auto sales
Molly Boessel, another CoreLogic economist, wrote in greater detail on the shrinking cash sales market. While sales of real-estate owned and otherwise distressed homes remained high last year by historical standards, especially in states still working their way back from high rates of foreclosure, the share of property sales that occurred because owners had fallen underwater declined on a year-over-year basis throughout 2013.
The heaviest cash sale markets in 2013, not coincidentally, were Miami-Miami Beach-Kendall, Fla., West Palm Beach-Boca Raton-Boynton Beach, Fla., Las Vegas-Paradise, Nev., and Fort Lauderdale-Pompano Beach-Deerfield Beach, Fla., all of which have experienced continued high rates of foreclosure.
Another CoreLogic economist, Sam Khater, wrote about the continued shift of subprime loans from the housing finance industry to the world of auto lending. He explained that no longer are home sales and auto sales correlated, a relationship that began to crumble during the recession when auto sales were declining but home sales were booming thanks to relaxed underwriting standards and alternative credit lending. In the post-recession world, however, the tables have turned, and even as the housing market picks itself up off the canvas, lenders have fared better in the automotive industry.
"After home and auto sales bottomed out in the late 2000s, auto sales recovered much quicker than home sales," Khater wrote. "In previous trough-to-current movements, home sales typically outpaced auto sales by a cumulative amount of 10 percent. In contrast, auto sales have outpaced home sales by 9 percentage points during this recovery, the exact opposite of prior expansions."