We research, you save.

Will marginal mortgage borrowers threaten the housing recovery?

 
Think Tank
Tony Ciochetti,
 Ph.D.
Professor of Finance and Real Estate at University of Texas at San Antonio
Currently on the Board of Directors of Real Estate Economics. Areas of research expertise include commercial mortgage credit risk.

The strict lending standards that have governed the mortgage and real estate markets for the last several years have certainly been effective at putting only the most credit-worthy borrowers into homes. That said, there is a growing demand among borrowers--who fall outside these strict parameters--who want to cash in on today’s historically low mortgage rates and attractive home prices.

Given the new law and the narrow definition of what constitutes a “Qualified Mortgage,” we interviewed Dr. Tony Ciochetti from the University of Texas at San Antonio to explain how the government should deal with “less-qualified” candidates and if this group of potential borrowers is really a threat to housing’s continued recovery.

Q: With losses still fresh in our minds, and with some homeowners still struggling, should we continue to advocate and support homeownership for marginal income/credit borrowers?

A: It has been an objective of our government to help support homeownership in the U.S. since the Great Depression; however, the recent housing collapse was driven in part by incentives that were in place during the “go-go” times of the early to mid-late 2000s. Loose borrowers, loose underwriting, loose credit, loose ratings, unique mortgage products and a general attitude that real estate only goes up all helped exacerbate the problem.

The lack of true accountability along many parts of the process allowed some to kick the can down the road until it became a national and international issue. There is no doubt that, while many housing markets in the U.S. are recovering, the pain will likely linger in others. Still, supporting homeownership in the U.S. is an important component of our economy and a fundamental aspect of achieving “The American Dream.”

At issue here is the definition of “marginal income/credit borrowers.” With proper underwriting, income verification, ratio analysis and valuation of the underlying security for the loan, we should be able to support well-monitored programs that help support homeownership.

Q: Currently, what’s the biggest threat to housing’s continued recovery?

A: Basic supply and demand issues will drive the housing markets going forward. Currently, demand has been recovering in the housing sector, which has helped prices recover from the lows of 2008 to 2010. To a degree, this recovery has been fueled by record low interest rates that make housing more affordable. In addition, new construction is at near all-time lows, so there is a limited supply of new product to compete with existing housing. As prices recover and the existing inventory of housing declines, builders will begin to create new inventory in markets where demand is strong.

In other markets where demand remains soft, prices are likely to recover at a slower rate. Most expect that mortgage rates will begin to rise at some point, although the increase may or may not impact buyer demand. All of these factors feed into what we refer to as “the housing recovery.” Lest we forget, the state of the economy impacts interest rates, job growth, retail sales, and the multitude of other factors that help consumers decide if they want to buy or sell a home.

Recommended Reading

  • image default

    The mortgage market's next opportunity

    Peter S. Reinhart, Esq., director of the Kislak Real Estate Institute at Monmouth University, discusses where the mortgage market is headed.
  • image default

    Why aren’t more young people buying homes?

    To find out why and to learn more about what can be done to attract more of this audience, we interviewed Mitchell Fillet, professor of business and finance at Fordham University and John Glascock, director of the Center for Real Estate at the University of Connecticut.
  • image default

    Has HAMP been a failure?

    Kristoph Kleiner, assistant professor of finance at the Kelley School of Business at Indiana University, explains his thoughts on HAMP, its implementation, its struggles and how the program can be improved.
  • image default

    How student loan debt is holding back first-time buyers

    Bennie D. Waller, Ph.D. of Longwood University and Bernard L. Weinstein, Ph.D. of Southern Methodist University discuss student loan debt on home-buyers.
  • image default

    Government regulation’s role in the mortgage market

    Dr. Mark A. Lane, associate professor of real estate and finance at Old Dominion University, offers his thoughts on the role of government regulation in the residential mortgage market.
  • image default