– Over the past 12 months, 1.5 million borrowers have purchased a home using down payments below 10%
– Such low-down-payment loans currently account for nearly 40% of all purchase originations
– Five-to-nine-percent-down-payment purchase lending grew at twice the rate of the overall purchase market in late 2016; less-than-five-percent-down loans saw growth at about the market average
– The average credit score on high-LTV purchase loans today is approximately 50 points higher than those originated in 2004 – 2006; among GSE loans, average credit scores are approximately 60 points higher
– FHA/VA market share is declining as GSEs expand low-down-payment lending footprint; over a quarter of GSE purchase lending in 2016 and early 2017 involved down payments of less than 10%
The Data and Analytics division of Black Knight Financial Services, Inc. released its latest Mortgage Monitor Report, based on data as of the end of June 2017. This month, in light of much commentary and speculation on the re-emergence of purchase loans with loan-to-value (LTV) ratios of 97% or higher, Black Knight looked at low-down-payment purchase lending trends, gaining some early insight into the performance of these products. As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, in general, low-down-payment purchases are on the rise, but this does not necessarily mean a return to the practices – and risks – of the past. “Over the past 12 months, approximately 1.5 million borrowers have purchased homes using less-than-10-percent down payments,” said Graboske. “That is close to a seven-year high in low-down-payment purchase volumes. The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low-down-payment loans have ticked upwards in market share over the past 18 months as well. In fact, they now account for nearly 40% of all purchase lending. The bulk of the growth has not been among the various three-percent-or-less down payment programs that have been reintroduced in the last few years, but rather in five-to-nine-% down payment mortgages. This segment grew at twice the rate of the overall purchase market in late 2016, whereas lending with down payments of less than five% grew at about the market average. “However, low-down-payment purchase lending today has a much different risk profile than it did back in 2005-2006 during the run-up to the financial crisis. At that time, half of all low-down-payment purchase originations involved ‘piggyback’ second liens, as opposed to a single high-LTV first lien mortgage. It’s also worth noting that while the total share of purchase lending going to borrowers putting less than 10% down was relatively similar then to what we see today, today’s low-down-payment mortgage products and secondary risk characteristics are markedly different. In the pre-crisis years, a large proportion of low-down-payment loans were more risky adjustable rate mortgages (ARMs). In contrast, ARMs are virtually nonexistent today among high-LTV loans. Perhaps the most telling difference is that borrowers using these programs today have average credit scores roughly 50 points higher than those approved for high-LTV purchase loans in 2004-2007. Among GSE loans with down payments under five%, average credit scores are 60 points higher today.”
Overall, defaults among current high-LTV mortgages remain low and performance has been much better than among similar loans in 2005-2006, likely due to a much improved borrower risk profile. After 15 months of observation, the serious delinquency rate of 97% LTV GSE originations is markedly higher than that of 95% LTV loans. However, in looking at the 2015 vintage, only one in approximately 450 GSE loans with an LTV of 96% or higher observed within the study was 90 or more days past due 15 months after origination. Based on early performance observations, today’s 96+% LTV GSE purchase loans have a serious delinquency rate over 90% below that of those originated in 2004 and 2005. Although the FHA/VA served historically as the primary source for such lending – particularly in the years immediately following the onset of the financial crisis – the market share in this segment has recently declined as the GSEs have expanded their low-down-payment lending footprints. In 2016 and early 2017, Fannie Mae and Freddie Mac accounted for over 10% of all sub-five-percent-down purchase lending, their largest such market share since early 2008. In fact, over 25% of all GSE purchase loans are now going to borrowers with down payments of less than 10%, indicating a significant change in the landscape of GSE purchase lending. While their market share has declined, the FHA/VA still controls the majority of the sub-five-percent down purchase space with over 80% of all such lending coming from those two entities.
As was reported in Black Knight’s most recent First Look release, other key results include:
– Total US loan delinquency rate: 3.80%
- Month-over-month change in delinquency rate: 0.12%
– Total US foreclosure pre-sale inventory rate: 0.81%
- Month-over-month change in foreclosure pre-sale inventory rate: -2.71%
– States with highest percentage of non-current loans: MS, LA, AL, WV, ME
- States with the lowest percentage of non-current loans: MT, OR, MN, ND, CO
– States with highest percentage of seriously delinquent loans: MS, LA, AL, AR, TN
Oil slides as output rises at Libyan’s largest oil field
Oil prices fell as much as 2% on Monday on selling triggered by a rebound in production from Libya’s largest oil field along with worries about higher output from OPEC and the United States. Output at Libya’s Sharara field was returning to normal after a brief disruption by armed protesters in the coastal city of Zawiya, the National Oil Corporation (NOC) said. The field has boosted Libya’s oil production, which climbed to more than 1 million bpd in late June. Global benchmark Brent crude futures were down 85 cents, or 1.62%, at $51.57 a barrel at 11:39 a.m. EDT (1540 GMT) after trading as low as $51.37 a barrel. US crude futures were down 89 cents, or 1.8%, at $48.69 per barrel, after sinking to a low of $48.54 a barrel. Both contracts stood well below levels hit last week, which marked their highest since late May. Doubts have emerged about the effectiveness of output cuts by the Organization of the Petroleum Exporting Countries and other big producers including Russia. OPEC output hit a 2017 high in July and its exports hit a record. “The petroleum markets are tipping toward the lower end of their recent trading range as oil producers meeting in Abu Dhabi have been slow to assure the market that compliance with this year’s production cuts will be improved, although we continue to note that adherence to the limits has actually been quite strong by historical standards,” Tim Evans, Citi Futures’ energy futures specialist, said in a note. “The recent increase in OPEC production has mostly been a function of recovering volumes from Libya and Nigeria.” Officials from a joint OPEC and non-OPEC technical committee are meeting in Abu Dhabi on Monday and Tuesday to discuss ways to boost compliance with the deal to cut 1.8 million barrels per day in production.
NAHB – housing market continues to make gains, though permits fail to keep pace
In a further sign that the housing sector is continuing to gain momentum, nearly 300 markets nationwide posted an increase in economic and housing activity from the first quarter to the second quarter, according to the National Association of Home Builders/First American Leading Markets Index (LMI) released today.
The LMI measures current home price, permit and employment data to plot the economic health of an individual market. Based on the 337 markets tracked by the index, nationwide markets are now running at an average of 102% of normal housing and economic activity. However, individual components of the LMI are at different stages of recovery. While employment has reached 98% of normal activity and home price levels are well above normal at 152%, single-family permits are running at just 54% of normal activity. “This report shows that the housing and economic recovery is widespread across the nation and that housing has made significant gains since the Great Recession,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “However, the lagging single-family permit indicator shows that housing still has a ways to go to get back to full strength.” “The overall index is running above 100% of normal largely due to healthy home price appreciation,” said NAHB Chief Economist Robert Dietz. “At the same time, the reason why single-family permits are barely halfway above normal is because builders continue to face persistent supply-side headwinds, including rising material prices and a shortage of buildable lots and skilled labor.”
Despite these challenges, the housing market continues to gradually move forward. The LMI shows that markets in 196 of the 337 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity in the second quarter of 2017. This represents a year-over-year net gain of 68 markets. “With 89% of all metro areas posting a quarterly increase in their LMI score, this is a strong signal that the overall housing market continues to make broad-based gains,” said Kurt Pfotenhauer, vice chairman of First American Title Insurance Company, which co-sponsors the LMI report.Baton Rouge, La., continues to top the list of major metros on the LMI, with a score of 1.76—or 76% better than its historical normal market level. Other major metros leading the group include Austin, Texas; Honolulu; Provo, Utah; and Spokane, Wash. Rounding out the top 10 are Ventura, Calif.; San Jose, Calif.; Nashville, Tenn.; Los Angeles; and Charleston, S.C. Among smaller metros, Odessa, Texas, has an LMI score of 2.14, meaning that it is now at more than double its market strength prior to the recession. Also at the top of that list are Midland, Texas; Walla, Walla, Wash.; Florence, Ala.; and Ithaca, N.Y.
Goldman sees unemployment below 4%, job market
– Goldman Sachs economists said the job market is doing better than they expected and doing so well it could “overshoot” full employment.
– The economists revised their forecast for unemployment to 3.8% next year from 4.1%.
– The economists expect the Fed will move faster than the market believes to raise interest rates — at a pace of one hike per quarter in 2018 and 2019.
Goldman Sachs economists say the outlook for jobs is even better than they thought, and unemployment could go as low as 3.8% next year. The firm’s economists, in a note over the weekend, talked about a labor market “overshoot,” with the trend in job growth remaining in the 150,000 to 200,000 range, twice its estimate of what the economy needs to maintain a healthy labor market. Friday’s July employment report showed job growth, at 209,000, well above the consensus 180,000 expected by economists. That follows 231,000 jobs in June, another month in which 200,000-plus growth was unexpected. The unemployment rate fell to 4.3% in July, a decline of 0.1 from June. The economists forecast the strong labor market should put the Federal Reserve on track to raise interest rates once a quarter, even if inflation remains below the Fed’s 2% target. Missing in the recovery has been a steady rise in inflation, signs of which are also missing in the labor market, in wage acceleration. The markets have doubted the Fed will be able to raise rates because of the lack of inflation, but Goldman economists disagree. Looking at such measures as the long-term unemployment rate, job openings and quits, and reports of skill shortages, “the labor market is about as tight as in the full-employment years 2006 and 1989, though not yet as overheated as in 2000. And while the recent hard wage data have mostly disappointed, surveys of wage growth among employers and households signal a wage acceleration to around 3% by the end of 2017,” they wrote. Wage growth in July was 2.5% on an annual basis. The economists said broader growth measures also look firm, and third-quarter GDP is tracking at about the same as the 2.6% reported for the second quarter. However, the rebound in productivity growth is fading. They forecast second quarter was a weak 0.6%.