Guest post by Steven Bray of Texas Lone Star Lending:
Economic Summary
The Texas economy continued to soften in May, although economic growth in Texas still is stronger than in the rest of the country. The labor market remains relatively tight with reports of difficulty hiring for skill positions. Construction and real estate activity continue to weaken. New and existing home sales fell, but median prices remained flat. Inflation expectations have become the big economic concern, fueled by run-ups in gasoline and food prices. While the core rate of inflation remains relatively contained, the headline number is high, and that has dampened consumer confidence.
Housing
Housing activity continued to decline last month. New and existing home sales fell further, and some builders are abandoning planned developments. Inventories are creeping up, but they remain in the 6-month range, which is helping to hold median prices steady. Texas continued to enjoy a relatively low foreclosure rate. Commercial construction activity was robust, but reports are that few new projects are being started because of tight credit conditions. Demand for apartments was strong, but there is concern about oversupply in Houston and Austin. Demand for other commercial property types continued to weaken.
Lending
Mortgage insurance (MI) companies continue to call the shots in the credit market. They have further restricted coverage for loans they consider to have greater risk, especially in areas they define as distressed or declining. Fannie and Freddie rolled back their "declining market" policies, but the MI companies have not. (Fortunately, areas of Texas have not been listed as declining markets at this time.) Condos and investment properties, as well as interest-only and high-leverage loans (regardless of property type) are feeling the pressure.
Rates have been under pressure the last month, sparked by inflation concerns. 30-year fixed rates have risen by more than 0.5%, and the 10-year treasury is seeing its highest yield since the beginning of the year. The consensus is that the Federal Reserve is done easing rates. With elevated headline inflation, there will be pressure on the Fed to tighten rates this year, but the expected slow economic growth likely will allow them to stay on hold. Nonetheless, those looking for a jump start for housing from low interest rates may be disappointed.
Lenders restricting use of 2nd liens
Some lenders have begun to restrict the maximum combined loan-to-value (CLTV) for property purchases to 95%. One lender also is restricting the first lien loan-to-value (LTV) to 80% for combos (simultaneous 1st and 2nd liens). These changes are not universal at this point, so shop around if your customer wants a combo to avoid mortgage insurance.
Freddie Mac more restrictive
Freddie Mac has lowered LTVs on a range of loan programs. The maximum LTV for 2-unit properties under the Home Possible program is lowered 95% and on cash-out investment properties is lowered to 85%. As of Aug 8th, Freddie will not approve mortgages for persons who have financed more than 4 properties (down from 10). These changes do not affect Fannie Mae loan programs at this time.
Fannie Mae releases new underwriting engine
One positive development is the new underwriting engine (DU) from Fannie Mae, which redefines risk factors. Being self-employed is no longer considered an added risk, which is good news for self-employed applicants who can document income. The updated engine also has clamped down on authorized user credit accounts. (This occurred when someone allowed another individual, relative or not, to be an "authorized user" for the purpose of boosting the user's credit score.) These accounts no longer will be used to determine an applicant's credit potential. On the down side, condos are now considered a risk.
Reduced-doc getting tougher
Lenders that still offer reduced-doc loans are getting more restrictive. Expect lenders to require applicants to demonstrate 6 months of reserves to qualify. In addition, minimum FICO scores are up (680 now the minimum) and LTVs are down (75% the generally accepted maximum). Three and four-unit properties no longer are eligible, and 2-unit properties only qualify if the applicant is willing to verify assets.