PERSON OF THE WEEK: Mortgage interest rates continued to rise this past week, with the average rate for a 30-year fixed-rate mortgage climbing to 5.54%, up from 5.51% the previous week and up significantly from 2.78% a year earlier, according to Freddie Mac.
Meanwhile, home prices have increased more than 20% on average during the past year, raising affordability concerns as more potential homebuyers get priced out of the market.
The result? Sluggish home sales and a rather gloomy outlook for the housing market in 2022-2023. To learn more about where the housing market and mortgage industry might be headed in the months to come, MortgageOrb recently interviewed Craig Crabtree, senior vice president and general manager, mortgage and housing for Equifax.
Q: How is affordability affecting the market? What are some challenges and solutions in this area?
Crabtree: For many Americans, housing affordability has become a major issue. As housing prices continue to surge and mortgage rates continue to rise to their highest levels since 2019, affordability and borrower buying power is being negatively impacted. Today, 25.8% of the median household income is required to purchase the average-priced home with 20% down and a 30-year mortgage, up from the 22.4% required at the end of the third quarter of 2021, according to Black Knights Mortgage Monitor Report. According to Pew Research Center, 70% of Americans said young adults today have a harder time buying a home than their parents’ generation did.
Interest rates have a huge impact on home prices as they determine how much a borrower can afford, which impacts the price of homes as the demand for homes increases or decreases based on affordability. For example, a home loan of $400,000, on a 30-year mortgage with an interest rate of 4 percent would result in monthly repayments of around $1,900. However, if this interest rate increases by even just 1%, it results in a $238 increase in a home buyer’s monthly mortgage repayment. The jump from $1,900 to $2,138 is impactful for most borrowers.
With U.S. consumers experiencing the highest rates of inflation in 40 years, rising housing costs, higher prices for gas and groceries on top of monthly debt payments are quickly escalating financial stress in households. Higher monthly DTI (debt to income) ratios inherently bring higher risk as there is less cushion to absorb continually increasing costs on top of unexpected household bills. Utilizing complete robust data sets such as verified income and employment status, rental payments, utility information and even cell phone bills, offers a more complete view of the applicant and their ability to repay loans on time and, as a result, FIs can feel more secure about their risk decisions.
Q: How have the recent industry changes affected the HELOC market?
Crabtree: Home equity has hit a record high, surging 35% in 2021, to a record $9.9 trillion, which equates to approximately $185,000 in equity for the average mortgage holder. With high housing prices and rising mortgage rates, many lenders are seeing an increase in requests for HELOCs from homeowners looking to take advantage of their available tappable equity.
With the available inventory of new homes for sale continuing to decline, the U.S. housing market is currently short between 500,000-750,000 active listings when compared to 2017-2019 December inventory levels. This low inventory is causing many homeowners to choose to stay in their homes longer, especially baby boomers who want to age in place, and homeowners tapping into their equity to remodel or upgrade their existing home rather than purchase a new one.
Q: How are technology and data insights helping lenders better serve homeowners looking to utilize their home equity?
Crabtree: Historically, lenders looked at home equity from a risk perspective using a very traditional credit scoring approach to evaluate the borrower’s ability to repay and minimize risk for the lender. While still relevant today, lender perspectives are changing. Technology and data insights are now playing a larger role in the process, creating a greater focus on the borrower’s overall financial health.
To meet the market demands, HELOC lenders must shift from a cumbersome paper-based origination process to a seamless digital one while identifying marketing opportunities, mitigating portfolio risk, and maintaining regulatory capital requirements. This requires a combination of predictive analytics, actionable data and event-based insights that can help lenders better capitalize on fast-moving market opportunities, paired with digital processes that increase operational efficiencies.
Q: What advancements are available today to streamline the HELOC process?
Crabtree: Technology continues to evolve to meet the demands of the lending market. The COVID-19 pandemic accelerated the digital transformation and adoption of technologies. Lenders now have digital tools to determine the value of a particular property and instantly verify employment status and income.
Also, borrower data on current assets, loan repayment history, unpaid debts and outstanding credit are now easily accessible. These capabilities enable lenders to better meet the demands of consumers by having a more well-rounded view of financial habits and removing friction from loan origination to speed up the process.
Existing solutions like automated valuation model (AVM), property conditions report and instant income and employment verifications help to expedite closing times. Lenders can identify borrowers who may have suffered a recent job loss or income adjustment to proactively work with them before they go into default. Automation is key for lenders to remain competitive in today’s fast-paced market. People will pay higher interest rates for a faster close or utilize a fintech whose automation allows them to close quickly.
