Does Less Regulation Equal More Loan Defaults? The recent U.S. House vote to roll back mortgage lending limits of the 2010 Dodd-Frank Bill was termed the “crown jewel” of Republican reform, but it is by no means a shoe-in in the Senate. However, if efforts are successful at raising the Debt-to-Income (DTI) ratio from its present 43% limit, what effect will the change have on future loan default rates? No one seems to have a functioning crystal ball, but there are few historical statistics to rely upon for hints.
Banking on Housing The truth about those DTI ratios can be misleading. There is little dispute that risky loans contributed to the housing meltdown, but other economic factors, including unscrupulous practices, played into the equation, as well as the belief that real estate values had no upper limit. The “qualified mortgage,” which currently exists, allows lenders to use less restrictive qualifying ratios but also be relieved of responsibility in case of default. It’s confusing, but federally-insured Fannie Mae and Freddie Mac loans already can be written with 45% debt-to-income rations. And Fannie Mae in June 2017 announced its intent to raise the DTI to 50%, citing statistics that show such an increase would not boost the foreclosure rate. Conventional lenders are the hardest hit, both because first-time buyers have difficulty qualifying and also due to a smaller second and vacation-home market. The economic effects of the recession went deep. It is hoped that a rising GDP, lower unemployment rate, expected interestrate adjustments, and potential tweaks to mortgage-lending rules will continue to strengthen the housing industry. The flip side of the equation is that current interest rates are still low but expected to continue to rise; appreciation rates have slowed over the past few months, but home prices continue to rise, due in large part to high demand. Buying today is viewed as a wise financial decision that is available to fewer first-time buyers. When a large number of potential buyers find it difficult to qualify, the entire market feels the effects and home ownership today is currently near a 50-year low in this country,
The Dilemma of Defaults Based on Federal Reserve Bank economic research, the historic home mortgage delinquency rate held relatively steady for decades, dropping from a high of 3.3% in the second quarter of 1991 to a remarkably low 1.41% for the fourth quarter 2004. Today, supporters of DTI modification
claim that it’s not the home loan itself, but rather other easy credit and high interest that leads to mortgage defaults. Is this the time to relax the rules across the board? There are some heartening signs, according to TrendStatistics:
Home loan default rates continue to fall from the high of 11% set in 2010, despite tax relief and expiring loan modifications;
The first-time buyer default rate is an extremely low .63%;
Second mortgage default rates are creeping slightly higher, but not enough to affect the big picture;
70% of new delinquencies are on loans that originated prior to 2009;
Overall consumer debt is decreasing, pointing perhaps to a higher level of borrower awareness and better management.
There is justifiable confidence that, even if the DTI limits are relaxed and lenders are allowed more local underwriting leeway, the default rate will continue to drop, or at least hold steady for the foreseeable future. Perhaps only time will tell.
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