Are some American homeowners getting too much of a good thing?
Looser lending standards have expanded the dream of homeownership to more and more people, but a persistently weak economy has been nibbling away at that dream, snatching away houses in foreclosure proceedings.
Perhaps, some experts suggest, the array of new mortgage products has become too generous.
‘‘We’ve been a little too aggressive," said Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co. ‘‘We may have pushed people a bit into more house than they can afford.’’
No one quibbles with the value of rising homeownership rates. Buyers are enjoying zero-down mortgages, nodocumentation loans and other new products.
Trouble is, that means more Americans are holding mortgages that would be unsustainable if they missed just one or two paychecks.
‘‘The past-due payments and serious delinquencies, foreclosures — the numbers are on the rise, and you can’t tell me it’s not because people may have borrowed more than they should have,’’ Jarrell said. ‘‘Sure, it’s job loss, it’s the economy, but it can also very well be that they bought more house than they can afford to start with, and now it’s coming home to roost.’’
Foreclosure postings expressed as the number of postings per 1,000 people have more than doubled in Collin and Denton counties since 2001.
If current trends hold, Dallas will be close to that pace by year’s end.
One contributor, experts said, is that the concept of saving to buy a house has changed.
Not too long ago, home buyers had to scrape together a 20 percent down payment to be considered for a mortgage.
Today, in many cases, Americans can buy a home with no money down even if they’ve filed for bankruptcy or previously been foreclosed on.
‘‘Over the last 10 to 12 years, underwriting guidelines have gotten much more lax,’’ said David Motley, an executive vice president at Colonial National Mortgage in Fort Worth. ‘‘Today you can get a 100 percent loan on a purchase or a 106 percent loan on your purchase to cover the closing costs.’’
Critics say the looser standards contribute to high foreclosure rates nationwide because owners with no equity in their homes find it easier to walk away from mortgages if they get into financial difficulty and can get approved for another mortgage later.
‘‘I do think that the erosion in underwriting standards, including the growing prevalence of low- or no-downpayment and nodocumentation or lowdocumentation loans, is contributing to the very high and rising foreclosure rate,’’ said Mark Zandi, chief economist of Economy.com, a consulting firm in West Chester, Pa., that specializes in studying regional economies.
Mortgage lenders say they know what they’re doing. A relatively recent invention — credit scores — lets them more accurately judge a borrower’s risk and set the interest rate at a level to make that risk worth their while.
‘‘It wasn’t until about 12 years ago that credit scoring was introduced into mortgage lending. Before that, it was done by hand, and you used a mandatory guide of ratios,’’ Motley said.
Those qualifying ratios told lenders how much house a consumer could afford by computing the proposed housing expense plus other longterm debt expenses as a percentage of monthly income. The mortgage industry developed the ratios by studying delinquency rates, foreclosure data and other statistics.
According to the industry standard, your monthly housing expenses — principal, interest, taxes and insurance — couldn’t exceed 28 percent of your gross monthly income. And your housing expenses plus other recurring debts couldn’t exceed 36 percent of your income, Motley said.
‘‘That was really before 1987,’’ he said. ‘‘Now ratios have been essentially thrown out the window as a guide toward underwriting mortgage loans. What matters is the credit score.’’
A credit score is meant to predict the risk of giving you a loan, and the scores are key to automated underwriting techniques, which have replaced a bank’s loan committee, said Jack Harris, research economist at the Texas A &M Real Estate Center.
‘‘They enable lenders to fine-tune the underwriting process, resulting in a higher statistical probability of making sound loans,’’ he said. ‘‘Lenders can extend loans to borrowers with lower credit ratings at higher interest rates. By being better able to spot bad credit risks, lenders feel they can offset any increase in risk exposure.’’
It also makes it easier for lenders to sell their loans to secondary investors — especially the unconventional loans — packaged as mortgage-backed securities. And that can provide more funds for lending.
Many investors even stipulate what kind of loan packages they’ll buy, said Keith Gumbinger, vice president at HSH Associates in Pompton Plains, N.J., which publishes mortgage information. ‘‘They say, ‘I’m going to make these loans with these characteristics. Now go find those borrowers for those. Maybe I’ll accept people with more debts than normal for higher interest rates.’ ’’
The array of loan types is dizzying.
A 30-year fixed-rate mortgage used to be about all a borrower could get. But at least 150 mortgage products are offered today, said Motley, who is also a board member of the Texas Mortgage Bankers Association. The options include adjustable-rate mortgages; interest-only mortgages, in which only interest is paid for the first few years of the loan; loans with a lumpsum ‘‘balloon’’ payment at the end; ‘‘option ARMs,’’ which permit borrowers to make a monthly mortgage payment determined by one of four methods; and even a 40-year mortgage.
For consumers with credit blemishes, there are other options.
TexasLending.com offers a zero-down-payment mortgage one day after the discharge of a Chapter 7 bankruptcy and a zero-downpayment mortgage one year after a foreclosure, although restrictions do apply.
Industry representatives say creative products give consumers more options, help expand homeownership and enable the industry to tailor its products.
Consumers with bad credit scores — the ‘‘subprime’’ market — aren’t the ones getting zero-down mortgages, said Doug Duncan, chief economist at the Mortgage Bankers Association. Zero-down loans are typically aimed at consumers with high credit scores and high incomes.
‘‘That’s the more typical zero-down customer. But there are entry-level people who have managed credit well and who have good employment prospects’’ who also qualify, he said.
One thing is clear about such loans: The smaller the down payment, the more likely consumers are to default.
‘‘Studies have shown that a loan’s default risk is directly tied’’ to the size of the down payment, Harris said.
The more money homeowners have in their homes, ‘‘the more likely they are to try and maintain ownership by keeping their payment current,’’ Duncan said.
No or low down payments can hurt homeowners in other ways. For one, they may pay higher interest rates to offset the extra risk. For another, it takes them longer to build equity.
‘‘If you don’t have any money down on the property, you don’t have a cushion in the equity of your home to play with,’’ Motley said. If you run into financial difficulties, there’s no equity in the home to tap, either through a second mortgage or through selling outright.
The liberal standards have also led some consumers to borrow more than they can afford.
‘‘We see debt ratios today that would have never been approved,’’ Motley said.
He gave this example: ‘‘Two borrowers husband and wife and they’ve got debt ratios of 40 percent for their proposed house and 60 percent for their total monthly debts. If they’re paying a 30 percent tax rate, they don’t have much money left over.’’
Even with low mortgage rates, first-time buyers have strapped on so much mortgage debt that ‘‘roughly onethird now pay at least 30 percent of their after-tax income on shelter, and half of the lowest-income households spend at least 50 percent of their incomes on housing,’’ according to a report published this month by Merrill Lynch.
About a third of homeowners in the Dallas-Fort Worth area are spending almost a third of their income or more on housing costs, according to figures released last week from the U.S. Census Bureau. That’s up from about 20 percent in 2000.
Many people owed more than their houses were worth — known as being upside down or underwater — just as the economic downturn hit. Some had little choice but to let the lender foreclose.
Many buyers bank on the fact that home prices usually appreciate, building equity automatically. But that doesn’t always happen.
Through the first seven months of the year, there was no change in Dallas-area home sales prices, according to North Texas Real Estate Information Systems.
And consumers are losing purchasing power.
Texas A &M does studies on median incomes and medianprice homes. In spring 2003, the median-income household in Dallas could qualify for a house that was 9 percent higher than a median-price home. In spring of this year, that had dropped to 1 percent.
Meanwhile, foreclosure levels are high nationwide. Mortgage Bankers Association figures collected since 1979 show that the percentage of homes in foreclosure hit a modern record of 1.51 percent at the end of the first quarter of 2002, just after the recession ended. They fell to 1.27 percent in the first quarter of this year.
The rate never cracked 1 percent until 1987.
Despite the foreclosure rates, lenders say there’s no conclusive evidence that home buyers are taking on more than they can handle.
‘‘I don’t think there’s enough historical evidence to say that people have been overloaned or that they have been underloaned,’’ Motley said. ‘‘The industry is much more sophisticated in its ability to evaluate a borrower’s likelihood of repayment.’’
Still, he said, if there were a collapse of property values on the magnitude of what occurred in Texas in the 1980s, all bets would be off.
‘‘We don’t really know what would happen if we were to repeat the ’80s — how good these credit scores would hold up in terms of their ability to predict a borrower’s repayment,’’ Motley said. ‘‘It’s a little bit disconcerting when you see people devoting such a high percentage of their monthly income toward housing.’’