The Unequal Costs of Black Homeownership (Compounded By Bank Regulations And QM Rules)

Ed Golding, formerly of Freddie Mac and now of MIT’s Golub Center for Finance and Policy, has an interest paper on “The Unequal Costs of Black Homeownership.”

“As Keynes noted, a small difference in interest rates can compound to a large number. A new study by the GCFP’s Executive Director, Ed Golding, and two co-authors, Michelle Aronowitz and Jung Choi, demonstrate that Black homeowners on average will pay $67,320 more for their houses because each month Black homeowners pay slightly higher mortgage rates, mortgage insurance premiums, and property taxes. If we eliminate these extra costs paid by African Americans, the $130,000 black-white gap in liquid savings at retirement would drop by half. This report will soon appear in the National Association of Real Estate Brokers 2020 Report on State of Housing in Black America.”

Then, on the other hand, black homeownership rates are at an all-time high as is black median weekly real earnings growth.

But Golding et al refer in their paper to “Black homeowners pay higher mortgage rates at origination.”

Why? How about the 16% mortgage denial rate for blacks compared to 9% for whites and Asians?

Let’s start with Laurie Goodman’s mortgage denial research at the Urban Institute. Their analysis revealed that % of loans to low credit households has decreased from 53% in 2006 (peak of the housing bubble) to 24% in 2017.

How about Fannie Mae’s and Freddie Mac’s average credit score of loans acquired? They rose over 25 basis points.

  • Thanks to my GMU FNAN 421 students for using Python to download and analysis Fannie and Freddie on-lined data.

While it is easy to blame Fannie Mae and Freddie Mac for increasing credit standards versus 2006, there are other mitigating factors … like the CFPB’s Qualified Mortgage (QM) ruling.

All qualified mortgages should generally meet the following mandatory requirements:

1.The loan cannot have negative amortization, interest-only payments, or balloon payments.

2.Total points and fees cannot exceed 3 percent of the loan amount.

3.The mortgage term must be 30 years or less.

Qualified mortgages must also satisfy at least one of the following three criteria:

1.The borrower’s total monthly debt-to-income (DTI) ratio must be 43 percent or less.

2.The loan must be eligible for purchase by Fannie Mae or Freddie Mac (the government-sponsored enterprises,or GSEs) or insured by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA),or the US Department of Agriculture Rural Development (USDA), regardless of DTI ratio.

3.The loan must be originated by insured depositories with total assets less than $10 billion but only if the mortgage is held in portfolio.

DTI of 43% or less?

Lenders have increased lending standards and that has been problematic for black households. In that respect, Senator Warren’s Consumer Financial Protection Bureau (CFPB) and The Federal Reserve have differentially-impacted black households given that black households have lower average incomes and lower credit scores than white households.

Lenders deny mortgages for Black applicants at a rate 80% higher than that of white applicants. And values of homes owned by Blacks are still 17.6% below the typical U.S. home.

So, making the financial market “safer” negatively impacts black households. We need to rethink QM and bank capital rules.

Existing Home Sales SOAR In Sept (6.54M Beats Expectation of 6.30M) As 30Y Mortgage Rates Hit All-time Low (2.80%)

More good news for the economy! And housing markets!

Existing home sales in September soared to 6.54 Million units (SAAR), higher than the expectation of 6.30 million units.

Existing home sales are exhibiting a V-shaped recovery.

As Freddie Mac’s 30Y commitment rate hits an all-time low.

Existing home sales hit a 14-year high! Thanks in part to tight inventories.

Median EHS prices hit an all-time high with near all-time low in inventory available for sale.

Seasonality Strikes! Mortgage Purchase Applications Fall By -1.96% WoW, Refi Apps Rise By 0.23% (Purchase Apps Up By 26% Versus Same Week Last Year)

Covid through the mortgage market for a loop. Normally mortgage purchase applications peak in late April or early May, but in 2020 unadjusted purchases applications peaked in mid-June thanks to Covid-19.

Here is a chart showing the seasonality of mortgage purchase applications. And how mortgage purchase application are 26 percent higher than the same week one year ago.

Refi applications? Essentially flat with an increase of only

V-Shaped Recovery In Housing Starts/Permits To Build (1-unit Starts Up 8.52% In September)

The housing starts numbers for September were released this morning and point to a V-shaped recovery for housing markets. 1 unit starts were up 8.52% and permits to build were up 7.8%.

This is a V-shaped recovery for single family housing.

Unfortunately, there is no V-shaped recovery in 5+ unit multifamily housing.

But the overall economy is showing a distinct v-shaped recovery, according to The Atlanta Fed GDPNow forecast model.

Lenders Tighten Standards On Credit Cards To Beyond Financial Crisis Peaks

To quote Dean Martin, “Ain’t That A Kick In The Head.” Let ’em have it!

Net % of Domestic Respondents Tightening Standards on Consumer Credit Card Loans just rose to a level higher than that of the financial crisis.

Odd since US home prices are rising through the stratosphere and mortgage rates are at an all-time low. Essentially, homeowners will equity in their homes may have to turn to cash-out refis in lieu of using credit cards.

Yes, cash-out refis (white line) have grown as consumer credit tightens (yellow line).

Like the sailor said, quote, ain’t that a hole in the boat?

Freddie Mac 30Y Rate Hits All-time Low of 2.81% (5/1 ARM Rate At 2.9%)

Chubby Checker would be proud! How low can we go?

Freddie Mac just reported that the 30-yr fixed-rate mortgage rate just hit an all-time low of 2.81%. Even lower that the 5/1 ARM rate of 2.9%.

But before you start to celebrate … M2 Money volatility is at its lowest EVER.

I still can’t believe that I used to play golf with these butter knives posing as irons. I just liked the bird on the ball.

A Farewell To ARMs: The Adjustable-Rate Mortgage Share Dwindles To 2% In Latest Mortgage Bankers Association Report)

Back in 2011, former HUD and Freddie Mac Chief Economist Michael Lea wrote an article entitled “Do We Need the 30-Year Fixed-Rate Mortgage?” We argued that plain vanilla ARMs (without teaser rates and other tricked-up products during the housing bubble) offered consumers advantages over fixed-rate mortgages (FRMs).

The answer to that question has just been answered: adjustable rate mortgages as a percentage of all mortgages has fallen to its lowest level since financial crisis and The Great Recession.

The reason? First, consumers flock towards FRMs when mortgage rates decline. In part, thanks to The Federal Reserve’s interest rate policies (as shown below).

Lea and I argued that there are certain advantages to ARMs for consumers (see paper at link), such as a lower mortgage rate on average.

Also, empirically mortgage rates on average fall negating the “fear factor” of mortgage rates rising on an ARM reset.

The latest mortgage applications volumes from the Mortgage Bankers Association shows that the ARM% has dwindled to 2%.

5/1 ARM rates (purple) are currently higher than fixed mortgages rates. The 15-year mortgage rate is the lowest.

Yes, it is A Farewell To ARMs, but not as Ernest Hemingway envisioned.

Hispanic Homeownership In USA Highest EVER As Hispanic Wage Growth Soars (Also Highest Ever)

There is a lot to celebrate in the housing market, particularly for Hispanic households.

Hispanic (Latino) homeowership has soared to its highest level in history, surpassing even the peak of the housing bubble in 2005-2007. The primary driver of the record Hispanic homeownership rates is soaring Hispanic wage growth YoY.

Black homeownership rates have also soared in 2020.

It is indeed a better world when minorities can share in the American Dream of homeownership and rising earnings.

Where Will Mortgage Rates Be In Three Years? Hint: Right Where They Are Now Because The Fed Isn’t Going Anywhere Until 2023

One question that is often asked if “Where Will Mortgage Rates Be In Three Years?”

Take a look at Freddie Mac’s 30Y mortgage survey rate (white line) and M2 Money Velocity (green line). And then overlay The Federal Reserve Balance Sheet, pushing down the benchmark 10Y Treasury Note yield. It is clear that mortgage rates aren’t going up anytime soon.

Look at home price growth and The Fed’s balance sheet. As the Fed began shrinking its balance sheet in 2018 and then the Case-Shiller home price index growth rate started falling … then recovered as The Fed threw more gas on the fire.

Gold? There is also a positive relation to The Fed’s balance sheet.

The Fed isn’t going until at least 2023. So, The Fed is here to stay, distorting markets and prices.

Rock and roll, hoochie koo.

MBA Mortgage Refi Applications UP 8.23% WoW While Purchase Apps DOWN -1.42% (Mortgage Credit Availability Sinks)

I was watching Stuart Varney on Fox Business and he excitedly announced that MBA applications were up 4.56% WoW in the latest MBA report.

True, but applications for a purchase mortgage were down -1.42% WoW.

But refinancing application were up 8.23% WoW as mortgage rates continue to fall since the Covid outbreak.

Mortgage credit availability plunged as mortgage rates hit all-time low.