By Ray Birch
PLANO, Texas—Lenders continue to take greater risks to keep the mortgage pipeline full—such as 40-year terms and 0% down—and one economist is urging them to rethink these approaches.
“My first reaction is, not again,” said Brian Turner, president and chief economist of Meridian Economics, referring to the 0% downpayment programs some CUs have begun offering. “That’s been tried before and both lenders and borrowers lived to regret it.”
As CUToday.info reported, a 0% downpayment loan and a mortgage with a 40-year term have been introduced recently by credit unions.
But unless the deal is made for refinancing, the borrower is essentially putting no equity into the home, Turner reminded about the 0% down offers.
It’s Inadvisable
“Whereas in other times that might not be necessarily a bad proposition, in today’s environment it’s inadvisable, even for the lender,” he said. “Without equity in the home during a period when credit risk mitigation is at its highest priority—due to delinquencies and foreclosure filings having doubled—a borrower risks having a huge deficit in their financial profile.”
Turner believes there is at least a 10% correction in home prices ahead, and believes borrowers in the 0% down deals could end up owing more on the home than its worth, making it difficult to sell or refinance later.
“No drop in mortgage rates from this point would help them to qualify either,” he added.
Brian Turner
PMI Should be Required
Moreover, Turner also believes underwriting rules should require the borrower to purchase private mortgage insurance, which adds to the cost for the buyer but also provides insurance against default to the lender.
“These additional costs to the buyer can reach a great deal of money,” Turner said. “Whereas some lenders might offer no-down payment loans, they might have stricter eligibility criteria.”
Turner also reminded that for the lender, unless the loan reaches 80% loan-to-value, the unqualified mortgage loan will be unsellable to government sponsored enterprises—Fannie Mae or Freddie Mac.
“And, therefore, must be managed properly in order to protect one’s longer-term liquidity profile— something that many institutions failed to do during the post-COVID 2022-23 period,” Turner noted.
Correction Coming
Turner is forecasting a correction in home prices is on its way.
“Lenders will quickly see loan-to-value rising at the same time that delinquency and foreclosure filings remain at elevated levels,” Turner predicted. “This could set up a perfect storm of sorts—falling LTVs, rising delinquency, greater number of foreclosures, elevated demand on liquidity due to core deposit volatility from inflation, lower overnight rates on cash and declining marginal yields on investments and consumer loans.”
No Need for Will Rogers
Turner feels strongly that lenders don’t need to feel such a sense of urgency with mortgage lending in the current market, and he urges FIs to “…certainly not adopt what I call the ‘Will Rogers form of lending,’ with the ‘I never met a borrower I didn’t like’ mantra,” Turner said. “Over the next 12 months, with all the potential volatility that most likely will come, even with a slight decline in consumer market and mortgage rates possibly in the offing, those market rates will still be higher than most portfolio yields in most loan holdings.
“If a lender has $100 million at 4% rolling off its portfolio in the coming 12 months, they have to originate only $59 million at today’s 6.75% market rate to equal the same $4 million in loan revenue,” continued Turner. “In most cases, even with a stagnant economic growth outlook that I have, member demand should still be enough to produce more than scheduled monthly principal roll-off.”