Challenges and Opportunities for Low Downpayment Lending Roberto G. Quercia UNC Center for Community Capital University of North Carolina at Chapel Hill Chapel Hill NC, May 17, 2013 Research Funded by the Ford Foundation
New Housing Demand Will Increasingly Come From Minority Families Who Tend to Have Lower Wealth and Need Access to Mainstream, Sustainable Loan Products Source: Population figures from Taylor and Cohn, Pew Research Center: Social and Demographic Trends, 2012; Wealth figures from McKernan, Ratcliffe, Steuerle, Zhang, The Urban Institute, 2013 80 60 40 20 0-20 -40 Changes in Population Share and Wealth White Hispanic Black Pop Share 2011 Pop Share 2050 (projected) Δ Wealth 2007-10 2-60
LTV 97% LTV 90% LTV80% FICO>600 FICO>660 FICO>690 DTI 45% DTI 36% DTI 30% DTI 27% Percent of Loans Excluded Current Single Focus on Risk Minimization May Lower Default But Closes Off Access to A Higher Percentage of Borrowers 80 70 60 50 40 30 20 10 0 Universe: QM Loans 8
Percent of Performing Loans Excluded 70 Low- and Moderate-Income Households Significantly Affected by Large Down-payment Requirements Measure: % of Performing Loans Excluded 60 50 40 30 20 10 0 3% Downpayment 10% Downpayment 20% Downpayment Low-Income Moderate-Income Middle-Income Upper-Income 12
Percent of Performing Loans Excluded 90 80 70 60 50 40 30 20 10 0 More Restrictive Down Payment Requirements Will Have A Disproportionate Impact on Communities of Color Measure: % of Performing Loans Excluded 3% Downpayment 10% Downpayment 20% Downpayment Non-Hispanic White African American Latino Asian 12
We know how to do Low-Down Payment Right Community Advantage Program: Borrower and Loan Characteristics Number of Loans 50,880 Dollars Loaned $4,656,660,187 Median Annual Income $30,792 Median Relative Income (% of MSA AMI) 60% Median Age Median Credit Score at Loan Origination 681 32 years Percent With Credit Score below 660 44% Percent Female-Headed Household 41% Percent Minority 39% Percent Rural 14% Percent Low-Income Census Tract (<80% MSA AMI) 32% Percent with Original LTV Ratio > 95% 69%
CAP Owners Have Built Wealth Since Origination, the median CAP owner has experienced... 1% annual house price appreciation 22% annual return on equity Home equity gains equivalent to a major portion of annual income
Product Matters For Similar Borrowers Predicted Serious Delinquency 24 Months after Origination 50% 40% 30% 20% CRA Subprime Subprime(Broker) 10% 0% 2004 2006 Note: Estimation is based on a borrower with a FICO score between 580-620 with the mean value of other regressors. Controlling variables include borrower DTI, FICO score, home equity, loan age, loan size, area credit risk, area unemployment rate, and interest rate environment.
Loans Low-Down Lending Done Right: State Housing Finance Agencies 140,000 120,000 100,000 80,000 60,000 40,000 20,000-1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
These Efforts Provide a Good Balance of Risk and Access 40 30 Serious Delinquency Rate (2012Q2) 32.5 20 18.2 10 3.9 5.3 6.5 9.0 9.1 12.8 0 Prime FRM HFA FNMA LTV>90 FHA CAP Prime ARM Subprime FRM Subprime ARM Note: Unlike others, CAP has added few loans in recent years. Sources: Mortgage Bankers Association; Fannie Mae; Self-Help; Moody s
Why are efforts such as these successful? Products Standardized products (e.g., 30yr FRM) are safe and increase transparency E.g., Ding, Quercia, and Ratcliffe 2011 Underwriting Good, careful, and flexible to consider additional information E.g., Courchane 2007; Apgar et al. 2007; Zhang 2010 Servicing Pro-active to accommodate temporary issues E.g., Stegman et al. 2007 11
Mainstream Low-Downpayment Lending What we know? Needed to serve future demand Can be done in a sustainable manner CAP and Housing Finance Agency models seem to work Can avoid the risks posed by dual markets What we do not know? How to bring these efforts to scale Geographic concentration impacts (right and wrong lending should have different geographic impacts) Place of low-down lending in a future housing finance system How to communicate with a policy public solely focused on minimizing risks without regard for the impact on access 12
Contact Us UNC Center for Community Capital www.ccc.unc.edu 13