Senior vice president "surprised" by two key findings in credit report
Brokers and lenders are missing out on business by not tapping into the low-to-moderate income (LMI) consumer segment, unaware this disadvantaged community could qualify for a mortgage program, according to Joe Mellman (pictured), SVP and mortgage business leader at consumer credit reporting agency, TransUnion.
Speaking to MPA following the release of the company’s Credit Industry Insights Report for Q4, Mellman said that one of his biggest surprises “was just how many LMI consumers are out there”.
He said: “We saw about half the population qualified as a low or likely low-to- moderate income borrower. That shocked me - I had no idea that there were that many consumers that met the qualification.”
According to data from the US Census Bureau, 64% of Americans are owner occupiers, while renter-occupied units roughly make up 30.8% of the inventory.
Read more: Housing affordability crisis – will it continue during 2022?
Mellman concluded that many LMI households had credit that would “absolutely qualify” for a mortgage program.
“We know from surveys and from talking to consumers that there is a misconception of how difficult it is to get a mortgage. They generally think credit has to be higher than it actually has to be, that their down payment has to be more than it is, and that their income has to be higher than it is,” he noted.
He said that this was an opportunity for lenders, stressing that mortgage professionals “will be surprised at how many consumers could actually qualify”.
He said: “Brokers are probably not aware of all of the low-down payment programs. I think that’s where the growth can come from. The second piece is being able to educate specific consumers and show how they can benefit. It’s really just putting all these tools together to reach out to consumers.”
Asked if the issue of affordability would put off most LMI households from even applying for a mortgage, given that property values had jumped almost 20% year over year, he said: “That’s going to be a sticky one, but LMI consumers are not going to be starting off focusing on the high-priced areas that are getting all the headlines, like San Francisco and Austin.”
Read more: Black homeownership – mortgage approval gap is widening
He cited local down payment assistance programs that could help LMI borrowers, making the point that both consumers and mortgage professionals were often unaware they even existed.
Cash-out refis growth “another surprise”
TransUnion’s quarterly report also showed further evidence of a shift from refinance to purchase as the mortgage market cooled down in the last quarter of 2021.
Mellman, however, expressed surprise that in a rising rate environment, cash-out refi had performed strongly, growing by 14% during the same period, reflecting homeowners’ increase in home equity.
This was all the more significant as rate and term refis had dropped by a hefty 42% year over year following the rise in interest rates.
“That’s a clear sign that consumers want to tap into home equity. It also points to real opportunity in the home equity loan and home equity line of credit space. Home price appreciation is a challenge to first time homebuyers, but cash-out refi is a huge boon to existing homeowners,” Mellman said.
The report also found that mortgage originations “started to slow from the peak levels seen in 2020”, dropping 13% year over year to 3.4 million in Q3 2021.
But although purchase volume remained flat in comparison to the previous quarter, it still accounted for 55% of the share of all originations in Q3.
“We haven’t really seen this amount of purchase volume since the housing boom,” he said, pointing out that the figures needed to be viewed in context because the previous year had seen massive growth. “The fact that we’re seeing sustained levels that high is really significant.”
The report also found that the consumer lending market had returned to pre-pandemic levels, “with balances even exceeding Q4 2019 numbers”.
Mellman said it was evidence that purchase “will continue to be strong” in the housing sector despite economic and logistical headwinds.
He said rates were currently at a level that would not deter potential homebuyers because demand was still outstripping supply, and he dismissed fears of a housing bubble akin to the 2007 crash, mostly because underwriting standards “are still extremely high” and not comparable to the subprime crash of 15 years ago.
“Fundamentally, people want to be in homes and there is a percentage of someone’s income that they’re able to spend on housing - that’s what we should fundamentally be tracking.
“As long as we’re within reasonable ranges of consistent and reliable income being spent on your housing, and that’s not over leveraged, we generally are still going to be in a safer zone. I don’t think we’ve reached the point yet where it’s unsustainable.”
