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THE LUMBER MARKET: Is the Tight Credit Box Opening?

The other set of regulations were for a Qualified Residential Mortgage (QRM). The QRM regulations (laid out in 553 pages) can require 5% retention of the loan value by the originator if these regulations are not met. Now the originator will have some “skin” in the game if the loan does not meet QRM specifications. During the housing boom, a mortgage originator did not care about default risk. They originated the loan and sold it to a PLS or GSE security pool and were not concerned about the potential for default.

To enforce the QRM regulations, another government agency was created— the Consumer Financial Protection Bureau (CFPB). Its role was to insure that consumers fully understood the terms of the loan, and that they really had the ability to repay the mortgage. During the boom period, interest reset clauses, negative amortization or balloon payments in some of the sub-prime mortgages caught a large share of borrowers by surprise. Many borrowers were qualified based on the initial monthly payments, not on the increases built into the mortgage. Borrowers said they did not understand how much the payments would go up or they thought they could refinance later after the home value went up. CFPB requirements have increased the cost of completing the mortgage
process. According to the Mortgage Banker Association (MBA), lender expenses for a mortgage loan in the second quarter of 2014 rose to $6,932—up 35% from two years earlier.

Will Recently Announced Changes Significantly Increase Mortgage Availability?

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The headline reports of major changes in lending standards are a little misleading. The changes are cleaning up the confusion about what is required by the originator to verify the borrower’s credit worthiness. QRM and a QM are now effectively the same.

Although not dramatic, these changes accomplish two important things that should improve consumer access to credit.

First, they reduce the risk exposure to a loan originator, clarifying exactly what is needed to verify the borrower’s financial situation. Second, they reduce the amount of paperwork involved in generating a mortgage that can be securitized.

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A recent article in the WSJ also suggested that this will help people with lower credit scores get access as well. At least one housing and financial analyst commenting does believe it will lead to a dramatic increase in loans to households with credit ratings below 660.

Bottom Line:

• The generally used measures of lending standards and credit availability have shown some easing in lending standards.

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• The moves to clarify and simplify regulation requirements to place mortgage with the GSEs should help open the overall credit box as well. Even so, it still appears that it will be several years before lending conditions return to what they were in the pre-bubble period. Certainly, there is no movement whatsoever in allowing new innovative and riskier private security pools to evolve.

• Although there is ongoing discussion among policy makers about how to revive the private mortgage backed securities, right now that is years away from happening. These recent changes could in fact inhibit the development of a market for private securities.

• The changes support modest improvement in single-family home sales in 2015—as forecast by FEA. We will monitor the situation, along with the other factors as we revise our longer-term forecasts for housing starts.

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