Home buyers were more active in purchasing newly constructed properties in July, rebounding from the month prior, with Federal Housing Administration and Veterans Affairs loan applications driving the increase, according to the Mortgage Bankers Association.
Loan volume for this segment jumped by 0.2% from June and was up 35.5% compared to the year prior, the trade group’s Builder Application Survey found. This is despite a volatile mortgage market where the conforming 30-year fixed rate mortgage has hovered at or above 7%.
The overall number of new single-family home sales was at a seasonally adjusted annual rate of 677,000 units in July 2023, a 1.5% decrease from the month prior. Unadjusted new home sales reached 56,000 in July, a 6.7% decrease from 60,000 new home sales in June.
“Applications for purchase loans on newly constructed homes remained strong in July, up 36% annually, as new homes continued to account for a growing share of homes available for sale,” said Joel Kan, deputy chief economist at the MBA in a written statement Tuesday.
Conventional mortgages continued to dominate the share of applications, making up 65.3% of all loans, slightly down from 65.5% the month prior. The percentage of U.S. Department of Agriculture loans remained unchanged at 0.3%.
However, the two categories which saw growth were the share of VA and FHA applications, which increased to 10.2% and 24.2%, respectively. The FHA share in July represented its highest since May 2020, noted Kan.
“FHA purchase loans are a popular option for many first-time homebuyers and this increasing trend in the FHA share is indicative of more first-time buyers looking to new homes as an option, given the lack of for-sale inventory among existing homes and challenging affordability conditions,” he said.
Meanwhile, the average loan size for new homes decreased from $400,281 in June to $397,148 in July, the survey said. In May, the average loan size was $403,581.
With strong demand and limited options for existing homes, many homebuyers are turning to new construction.
Mortgage applications for new construction home purchases increased 35.5% in July on a year-over-year basis, according to the Mortgage Bankers Association (MBA) Builder Application Survey (BAS) data. On a monthly basis, applications ticked up by 0.2%. This change does not include any adjustment for typical seasonal patterns.
MBA’s survey tracks application volume from mortgage subsidiaries of homebuilders across the country.
“Applications for purchase loans on newly constructed homes remained strong in July, up 36% annually, as new homes continued to account for a growing share of homes available for sale,” said Joel Kan, MBA’s vice president and deputy chief economist.
Overall, 24.2% of purchase applications came from the FHA , the highest share since May 2020. Additionally, the share kept increasing in four of the last five months.
“FHA purchase loans are a popular option for many first-time homebuyers and this increasing trend in the FHA share is indicative of more first-time buyers looking to new homes as an option, given the lack of for-sale inventory among existing homes and challenging affordability conditions,” added Kan.
According to MBA estimates, new single-family home sales were running at a seasonally adjusted annual rate of 677,000 units in July 2023. It’s down 1.5% from the June pace of 687,000 units. On an unadjusted basis, MBA estimates that there were 56,000 new home sales in July 2023, a decrease of 6.7% from 60,000 new home sales in June.
Conventional loans made up for the majority of loan applications
By product type, conventional loans made up 65.3% of loan applications. Meanwhile, FHA loans composed 24.2% of total loan applications while RHS/USDA loans composed 0.3% and VA loans composed 10.2%. Simultaneously, the average loan size for new homes decreased to $397,148 in July from $400,281 in June.
However, the 7% mortgage rates and reduced housing affordability pushed down the homebuilder’s confidence index, which fell to 50 in August. New home sales also dipped 2.5% in June.
Right now, home equity levels are high for many homeowners across the nation. According to a recent Black Knight report, the average mortgage holder currently has about $199,000 in usable equity available to them.
There are numerous factors that have contributed to this — including a shortage in available home inventory and increased demand due to low mortgage rates during the pandemic. In turn, this is a great time to borrow against your home equity if you need to — and at a lower rate compared to credit cards or other loan products.
If you want to take advantage of your home equity, there are a few different options for doing so, including home equity loans, home equity lines of credit (HELOCs) and cash-out refinances. But if you’re a new homeowner, how quickly can you tap into your home’s equity — and what options do you have?
Learn more about your home equity options here now.
How quickly can you get a home equity loan after buying your home?
If you just bought your home and want to tap into your equity, here’s when you may be able to do so.
When can you take out a HELOC?
A home equity line of credit (HELOC) is one home equity loan option you have after you purchase a home. A HELOC works much like a revolving line of credit but it uses your home as collateral. This type of home equity loan allows you to borrow funds up to a pre-approved limit (typically up to 80% of the equity in your home) and pay the money back after a certain time.
HELOCs are popular because they provide the flexibility of accessing funds during the draw period. That makes them a good option for homeowners who will have varying financial needs over time or those who don’t want a lump sum loan.
So when can you borrow money with a HELOC? Well, it generally depends on the lender. While you can technically take out a HELOC as soon as you purchase your home, many lenders require you to own your home for at least a few months before you can qualify. And, you’ll also need to meet the lender requirements, including the minimum home equity requirement, to be approved — which is also likely to affect the timeline for when you can borrow against your home equity.
Find out the home equity loan terms you may qualify for here now.
When can you take out a home equity loan?
A home equity loan works like a second mortgage and provides you with a lump sum of money based on the equity you’ve built in your home. Unlike a HELOC, a home equity loan is a one-time borrowing arrangement with a fixed interest rate and fixed monthly payments. You can use a home equity loan for any number of purposes, but’s ideal for projects with a specific cost, like a kitchen remodel or debt consolidation.
In general, home equity loans can be pursued shortly after purchasing a home, often within the first year — but each lender has unique requirements for approval. Your credit score and equity in the home will still play a significant role in securing favorable terms, and most lenders will require you to have at least 15% to 20% equity in your home before you’re approved.
When can you take out a cash-out refinance?
A cash-out refinance differs from HELOCs and home equity loans. Rather than a second mortgage, a cash-out refinance replaces your existing mortgage with a new one that has a higher principal balance. The difference between the old and new mortgage amounts is taken as cash, which you can use for various purposes. This option allows you to take advantage of potentially lower interest rates on the new mortgage.
As with the other home equity options, the timeline for getting a cash-out refinance is highly dependent on the lender. However, a cash-out refinance is typically an option after you’ve gained substantial equity in your home, which generally happens after owning it for a few years.
It’s worth noting that cash-out refinances make the most sense to use if mortgage interest rates have dropped lower than when you first obtained your mortgage. Otherwise, you are trading in your low mortgage rate for a new loan with a higher rate, meaning you’re paying more overall for your loan.
Explore your refinancing options here now to learn more.
The bottom line
Home equity loans, HELOCs and cash-out refinances can all be viable solutions for harnessing the value of your home, and in certain cases, you may be able to access them just a few months after closing. But the decision to tap into your home’s equity should be made carefully — and at the right time. Be sure to weigh your financial goals, your home equity loan options and other factors before making any decisions.
The Fed recently announced yet another interest rate hike, making borrowing more expensive and pushing the prospect of purchasing a new home out of reach for an even greater share of Americans. At the same time, inflation is easing and the economy is showing unanticipated strength, with strong employment numbers and greater than expected GDP. All this means one thing for current and prospective homeowners – they shouldn’t expect the Fed to begin lowering rates any time soon.
Though this would typically signal a time for panic across the residential real estate profession, those who can focus on servicing their clients with a mind for the future will be well positioned for whenever the economics for home buying become more favorable.
Double down on relationship building
High mortgage rates mean those on the margins of potential homeownership are moved one step further away from their goal. It also means those currently in homes — some of whom purchased or refinanced through the historical low interest rate period after the pandemic — are disincentivized to buy a new home at current rates. Furthermore, for those looking for their next home, higher interest rates effectively reduce their buying power, translating literally to fewer and fewer square feet, bedrooms and bathrooms.
Real estate teams may lament homeowners’ waning interest in buying (or selling) into this market. But there are things real estate pros can do to make productive use of the moment, and double down on relationship building with new and existing clientele.
Educate and update
Stay connected. One of the biggest mistakes real estate professionals can make, regardless of the market, is not staying in touch with clients. Real estate can be a transient profession with many newcomers flocking to the industry when times are good, and falling out when times are tough. Times are decidedly difficult right now, reducing deal flow and overall revenue potential. Many will see the moment worthy of a pullback in their efforts, focusing on clients with a greater, real or perceived, likelihood of being able to transact. That state of mind is an absolute mistake.
Provide clients with market updates. Sharing recent news and its practical implications with current and prospective clients is an excellent way to check in and ensure they have a strong understanding of what impact rate increases, strong economic numbers and more will have on their immediate transaction prospects. Whether buying or selling a home, real estate pros who help their client base to have a clear understanding of what is happening, why, and what impact it will have, take advantage of a unique trust building opportunity. They provide clients with extra reassurance that they are indeed receiving good counsel on their (eventual) property endeavors.
Track and report on falling prices. High mortgage rates hurt home buying and selling prospects. However, for some, higher interest rates can bring home prices down just enough to account for the added cost of a higher interest rate. In some scenarios, if a prospective buyer can carry a more expensive rate, they may secure a home at a lower price, and then aim to refinance when rates have improved.
Understanding and activating home equity. Hikes in interest rates also affect the price of revolving debt. Most, if not all, revolving credit moves with the prime rate; meaning, it just got even more expensive to carry a balance from one month to the next.
Real estate professionals can educate clients on the prospect of leveraging the equity they have in their current home to consolidate consumer debt through home equity based products like HELOCs, home equity loans or other home equity based products, that tend to have better terms than other forms of debt. Home-equity products also provide a path to financing home improvement projects that can raise the value of a home, while clients wait for the environment for putting a home on sale to improve.
Keep the door open. Financial situations are constantly in flux. Did a client recently get a new job? Did a relative pass away leaving them with a large inheritance? Did your clients just become empty nesters? New occurrences in life bring about different new ways to view possibilities. No one wants to buy a home for more money than they have to, but new circumstances can open the door to revisiting property aspirations that weren’t reasonable conversations just moments before. Keeping an open door to those who have new circumstances will help real estate pros adjust their approach for specific clients.
Unprecedented and unfamiliar economic cycles like the one we are in today provide a great deal of room to drop the ball or lose interest. Those real estate teams that refocus on the basics of building trust through credible counsel and insight will see more deeply engaged client prospects, and eventually, transactions that can keep the business afloat during a time when the entire industry is facing headwinds.
Jeff Levinsohn is CEO and Co-Founder of House Numbers, a service to help homeowners gain financial independence by understanding and optimizing their largest asset — their home.
According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), 40.5% of new and existing homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $96,300. This is down from 45.6% posted in the first quarter of this year, and the second-lowest reading since NAHB began tracking affordability on a consistent basis in 2012.
Previous results
As another reminder of ongoing housing affordability challenges, the second quarter 2023 HOI reading remains lower than the second quarter 2022 score of 42.8%.
The HOI shows that the national median home price increased to $388,000 in the second quarter, up from $365,000 in the previous quarter. Meanwhile, average mortgage rates were 6.59% in the second quarter, up from 6.46% in the first quarter.
Regional data
The top five most-affordable major housing markets in the second quarter of 2023 were:
Lansing-East Lansing, Michigan
Scranton-Wilkes-Barre, Pennsylvania
Harrisburg-Carlisle, Pennsylvania
Indianapolis-Carmel-Anderson, Indiana
Pittsburgh, Pennsylvania
The top five least-affordable major housing markets were all located in California:
Los Angeles-Long Beach-Glendale, California
Anaheim-Santa Ana-Irvine, California
San Diego-Chula Vista-Carlsbad, California
Oxnard-Thousand Oaks-Ventura, California
San Francisco-San Mateo-Redwood City, California
NAHB’s take on the data
“While builders continue to face a number of affordability challenges, including a shortage of distribution transformers, elevated construction costs and a lack of skilled workers, they remain cautiously optimistic about market conditions,” says NAHB Chairman Alicia Huey. “A lack of existing inventory is fueling demand for new construction, and mortgage rates are expected to stabilize in the weeks and months ahead as the Federal Reserve nears the end of its tightening cycle.”
“Rising mortgage rates in 2023 that peaked near 7% recently have been a major factor in declining affordability conditions,” says NAHB Chief Economist Robert Dietz. “Given the Fed’s limited ability to address rising construction costs, the best way to satisfy unmet demand and ease the nation’s housing affordability crisis is to enact policies that will allow builders to construct more homes.”
Borrowers commonly ask, “How soon can I get a HELOC after purchasing a house?”
And the answer is simple answer: You can apply for a home equity line of credit (HELOC) the minute you close on your house purchase, without any legal or regulatory waiting time.
However, there are practical issues that mean many recent homeowners cannot apply that quickly. And in this article, we’ll explore those issues so you’ll know when you can get a HELOC.
Check your home equity loan options. Start here
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How soon can I get a HELOC or home equity loan?
So, what stops some recent homeowners from getting a HELOC (or its big brother, the home equity loan, aka HELoan) straight after closing? It’s something called the “combined loan-to-value ratio” (CLTV).
People who’ve owned their homes for several years or for decades are rarely affected by this. But those who have more recently become homeowners can find it an unsurmountable obstacle to home equity borrowing.
“The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic.” — Selma Hepp, Chief Economist for CoreLogic, June 2023
“Combined loan-to-value ratio”
HELOCs and HELoans are both forms of second mortgages. And that means they’re secured on your home.
But lenders of mortgages and second mortgages have strict rules about the proportion of a home’s market value that can be secured borrowing.
Often, a HELoan lender requires an 80% CLTV. That means all your borrowing secured by your home — your first (main) mortgage plus any second mortgage(s) — can’t exceed 80% of the home’s market value.
Home equity is the inverse of CLTV. It’s the amount by which your home’s value exceeds your mortgage balance. So, an 80% CLTV means a 20% equity stake. And a 90% CLTV means you have 10% equity.
How do you calculate how much equity you have?
Suppose you’re buying your home now and it’s worth $400,000. And let’s assume you’re making a 20% down payment.
That down payment would be $80,000 ($400,000 x 20% = $80,000). So, your mortgage balance would be $320,000 ($400,000-$80,000 or 20% = $320,000).
So, you’d have 20% equity, which means an 80% CLTV.
Example of how your CLTV might move
Of course, rising home prices would mean your home’s market value increases. And your mortgage payments will (slowly at first) reduce your mortgage balance.
Naturally, those will change your CLTV. Indeed, there are times when it could change daily.
Let’s continue with our earlier example. Suppose home prices increased 20% during your first year of owning the home. The home’s value would increase to $480,000 ($400,000 + 20% = $480,000).
And your mortgage balance would reduce by perhaps $3,750 that year as a result of your monthly payments. Read about amortization to discover why most of your monthly payments in the earlier years of your mortgage go on interest.
So, your CLTV would be calculated based on a home value of $480,000 and a mortgage balance of $316,250. That’s $316,250 ÷ $480,000 = 65.9% CLTV. Looked at another way, your home equity would be 34.1% (65.9% + 34.1% = 100% of your home’s value).
In those circumstances, you could borrow a HELoan or HELOC that would take your CLTV up from 65.9% to the 80% cap. That’s 14.1% of your home’s market value (80% – 65.9% = 14.1%).
We know that the value is $480,000. And 14.1% of that is $67,680, which is the amount you could borrow. ($480,000 x 14.1% = $67,680).
Check your home equity loan options. Start here
How soon can I get a HELOC? It mostly depends on how quickly home prices are rising
You witnessed home prices rising as a nationwide average at more than 20% a year for a while. But more recently, they’ve been rising much more slowly. For example, according to the Federal Housing Finance Agency house price index, they increased by 3.1% during the year ending April 2023.
Naturally, the slower home prices rise, the longer it will take for you to build equity in your home. And, to answer our original question, “How soon can I get a HELOC?”, that will take longer, too.
It’s not always an 80% CLTV cap
One more thing on this topic. Most HELoan lenders prefer an 80% CLTV. But you might find one that’s a bit more flexible; 85% CLTVs are fairly common.
However, HELOC lenders tend to be easier going. And you might be able to find one of these lines of credit with a CLTV as high as 90%.
How soon can I get a HELOC after applying for one?
The closing process on a HELOC varies widely depending on your lender’s requirements, how busy it is, and the complexity of your case.
You’d be very lucky for it to take less than 15 days but unlucky for it to take much more than 45 days. That’s roughly two-to-six weeks from your making your application to your getting your money.
It’s mostly similar for home equity loans. But it may be rarer to close in 15 days and less unusual to do so in more than 45 days.
Check your HELOC or home equity loan options. Start here
What is a HELOC?
Think of a HELOC as the mortgage version of a credit card.
It’s like a card because you’re given a credit limit and can borrow, repay and borrow and repay again as often as you want up to that limit. And you pay interest (mostly at a variable rate) each month only on your then current balance.
However, a HELOC is better than a credit card for a few reasons. Most importantly, its interest rate is likely to be a fraction of a card’s.
And you’re under no obligation to pay back any of your balance until you’re ready to do so. Your minimum payment is purely the interest for that month.
Pick the right time
Another difference from a card is that your HELOC is time limited. You can largely choose how long you want it to last, up to 30 years. But the account will end one day. And you will eventually have to zero the balance.
To make sure you can do that comfortably, HELOCs are divided into two phases. During the first, the “draw period,” you can borrow up to your credit limit at will. But then you enter the repayment period.
And then you can’t borrow any more. Instead, you must repay the loan (including new interest) in equal monthly installments. If that’s an issue at the time, you may be able to refinance your HELOC.
As we said, you largely get to choose how long your draw and repayment periods last. Each commonly exists for five or 10 years, but 15 years isn’t unknown. So, altogether, you could have your HELOC for up to 30 years.
To keep down borrowing costs, you should choose the shortest period that you’re confident you can comfortably manage. But affordability must be your first priority. So take as long as you need.
If you’re wondering if it’s a good idea to get a HELOC, you must have enough equity in your home to meet the lender’s requirements. And you’ll likely need a credit score of 620 or better, an existing debt burden that’s not too onerous, and a steady source of income.
What is a home equity loan?
A HELoan is much easier to get your head around than a HELOC. There are no draw and repayment periods: it’s a straightforward installment loan, typically with a fixed interest rate.
In other words, you get a lump sum on closing. And you repay it in equal monthly installments. So, budgeting for one of these couldn’t be more simple.
Verify your home equity loan options. Start here
They typically have loan terms ranging from 10 to 30 years. You can deduct interest paid on this loan type, but only when using funds to buy or build a property or “substantially improve” a property you already own.
Pros and cons of tapping home equity
Here are some important pros and cons of tapping your home equity:
Pros
Home equity products are among the least costly forms of borrowing
These are “any-purpose” loans, meaning you can use the money any way you want
You may get tax deductions if you use home equity borrowing to improve your home
Tapping home equity means you don’t have to refinance your entire mortgage. After recent rate rises, you’ll probably want to leave your main mortgage’s low rate in place
Pick the HELoan or HELOC term that you find affordable: usually, from five-to-30 years
Choose between the predictable HELoan and the flexible HELOC
Cons
HELoans and HELOCs are second mortgages. So, your home is at risk if you fail to keep up payments
People with uber-high credit scores may be able to find personal loans with rates that rival home equity products. Grab one if you can (see Con 1). But very few qualify for such low rates
Find your lowest HELOC rate. Start here
The bottom line
The average American homeowner has $274,000 in equity as of the Q1 2023, according to CoreLogic. Tapping a HELOC or HELoan are among the least costly ways of borrowing.
Most of those average homeowners would see their applications approved because it’s not hard to qualify for a HELOC or HELoan. They could get their money in roughly two-to-six weeks.
However, those who became homeowners in recent years may have to wait to qualify. That’s because they need enough home equity to secure their new borrowing while leaving an equity cushion to protect their existing first mortgage.
If you’re ready to tap your home equity, let us help. We’ll introduce you to lenders that can offer you competitive quotes.
Time to make a move? Let us find the right mortgage for you
You may have watched a movie in which a character pulls out a fancy black credit card and brags about how he has access to unlimited money. The reality is that there is no such credit card. Some credit cards do come with “no preset spending limit,” but even those cards have some sort of controls and restrictions.
When you have a credit card with no preset spending limit, each purchase is evaluated on a case-by-case basis for approval. As long as you are using the card responsibly and regularly paying down your balance, you shouldn’t have any problems with purchases being declined.
Do No-Limit Credit Cards Exist?
While most credit cards do come with specific credit limits, there are cards that intentionally have no preset spending limit. Those card holders never have to worry about managing their available credit. Instead, the issuer will evaluate each purchase as it’s made to determine whether to approve it. The issuer may also provide a tool where you can check beforehand to see if a purchase will be approved.
💡 Quick Tip: A SoFi Credit Card provides access to a line of credit. It’s essentially a short-term loan that you repay each month.
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Where Does the Idea of No Limit Cards Come From?
To “average” people who stick to a budget and pay their bills each month, there is something aspirational about a magical no-limit credit card. If you have an average credit limit, you might wonder what it is like to not be encumbered with one. Pop culture plays into this common desire to know what it would be like to be obscenely rich and not have to worry about money.
The Myth of the Black Credit Card With No Limit
In pop culture, the no-limit credit card always seems to be black, and there are ultra-luxury black credit cards. For example, American Express has the Centurion Card, which is a black credit card that is only available by invitation. But while the Centurion card (and other similar cards) don’t come with a preset spending limit, that doesn’t mean there is no limit at all.
Recommended: What Is a Luxury Good?
Pros and Cons of Cards With High Spending Limits
Here’s a quick overview of some pros and cons of high limit credit cards:
Pros
Cons
More convenient to pay for larger expenses
It may be tempting to spend beyond your means
Harder to go over your credit limit
If your card is stolen, you may be at a higher risk before you notice
A high credit limit can help your credit utilization ratio, when used responsibly
A higher credit limit could mean more debt to pay down
A higher spending limit may allow you to earn rewards like unlimited cash back
💡 Quick Tip: A SoFi cash-back credit card is a great way to earn rewards without a complicated redemption process. Even better, SoFi doesn’t place limits on the amount of cash-back rewards you can earn.
What Does It Take to Have a High Limit Credit Card?
Most credit card issuers use a variety of factors when deciding both whether to approve you for a credit card and what credit limit to extend. Here are a few factors that may come into play:
A Good Credit Score
Most cards that come with no preset spending limit are considered premium or luxury credit cards. That means that you will likely need good or excellent credit to be approved.
Recommended: 8 Tips for Maintaining a Good Credit Score
A High Income
Another factor that can help you to get a high limit on a credit card is a relatively high income. Banks generally use an applicant’s income as one factor in determining a credit limit for a card. If you have a low annual income, a bank may be hesitant to issue you a credit card with a high spending limit.
An Existing Relationship With the Bank
Many banks are interested in building a relationship with their customers, especially ones they consider to be high-value. Showing that you are a loyal customer can encourage a bank to extend you additional credit. Ways to build your relationship with a bank might include opening checking or savings accounts, taking advantage of their credit card rewards program, or responsibly using existing accounts with them.
The Takeaway
While some credit cards come without a preset spending limit, all credit cards have some limitations in place. There is no publicly available credit card that will allow you to spend and spend with no consequences. If you have a card with no preset spending limit, the issuer will decide on a case-by-case basis whether to approve each purchase.
Looking for a new credit card? Consider a rewards card that can make your money work for you. With the SoFi Credit Card, you earn cash-back rewards on all eligible purchases. You can then use those rewards for travel or to invest, save, or pay down eligible SoFi debt.
The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1 Take advantage of this offer by applying for a SoFi credit card today.
FAQ
Is there a credit card that has no limit?
There aren’t really credit cards with no limit at all (like you might see in the movies). But there are credit cards that don’t have a preset spending limit. Instead, the credit card issuer will evaluate your overall financial information to determine whether to approve any purchases. This might include your income, net worth, relationship to the bank, and previous spending and payment history.
How do people get no limit credit cards?
Most cards that come with no preset spending limit are luxury credit cards, which means that you’ll need to have good or excellent credit. Having a high income is another factor that can improve your odds of being approved. You might also consider strengthening your relationship with the issuing bank, like opening a checking account or other credit cards.
What does no limit credit card mean?
A no-limit credit card generally does not mean a credit card with absolutely no limit at all. Instead, many times people are referring to a credit card with no preset spending limit. When you have a card with no preset spending limit, you won’t have a specific available credit or credit limit — instead, the bank will determine whether to approve each transaction based on your overall financial information and/or past spending history.
Photo credit: iStock/Delmaine Donson
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[UPDATE: This story has been updated with information from Wells Fargo’s Tom Goyda that this change to their policy was put in place several months ago.]
Homeowners who were placed into proactive forbearance plans by Wells Fargo received positive news this week.
Law360 reports that in response to a class action lawsuit filed in Virginia, Wells Fargo has agreed not to place homeowners into a COVID-19 forbearance plan or extend an existing plan unless a customer requests forbearance.
The lawsuit claimed the bank placed customers into these plans without notice, a direct violation of the Coronavirus Aid, Relief and Economic Security Act.
A major complaint from the plaintiffs highlighted the negative impact the forbearance had on their individual credit scores. In some cases, the account holders asked to be removed and continued making their normal loan payments.
Tom Goyda, senior vice president of consumer lending communications for Wells Fargo, told HousingWire that the company made changes to practices “several months ago” in regard to COVID-related forbearance.
“We now require an affirmative request from a customer before providing a COVID-related forbearance,” he said.
After reports surfaced in July that Wells Fargo was placing consumers into forbearance without their request, Senator Elizabeth Warren, D-Mass., a member of the Senate Banking Committee, pressed the bank for more details. She sent a letter on Oct. 1 to Federal Reserve Chair Jerome Powell that detailed the response from Wells.
According to that letter, “Wells Fargo admitted to entering certain customers into forbearance without their consent, identifying four categories of customers who were affected.
“The company was unable or unwilling to identify how many total consumers were affected, but did inform the Senators of a small subset, indicating that ‘(a)n internal review showed that at least 904 accounts held by customers in active bankruptcy proceedings were placed into forbearance without an affirmative request,’ and that the bank had received over 1,600 complaints about forbearance practices.”
The letter outlines the categories of affected customers:
“In early March, Wells Fargo began providing forbearances to customers in active bankruptcy proceedings if we identified a court filing indicating that the customer may have been suffering a COVID-19-related hardship.”
“From late March until early April, we automatically provided forbearances to customers who sent a secure email or contacted us by phone regarding a COVID-19-related hardship, as well as to customers who requested a fee waiver, even when the customers’ communications did not specifically request a forbearance.”
“In late March, Wells Fargo also granted forbearances to eligible Home Preservation customers (including some customers in active bankruptcy proceedings) who at the time: (i) were in the loan modification application process; or (ii) had been denied a forbearance before the pandemic.”; and
“Finally, in late March and early April, when a customer requested forbearance on one of the customer’s mortgage or home equity accounts, we extended the forbearance to that customer’s mortgage-linked accounts.”
Wells Fargo representatives have argued the bank should be dismissed from the suit because customers “didn’t send the requisite notice of error before filing a lawsuit, and they don’t allege cognizable damages.”
Many components of the capital rules that federal regulators proposed last month last month have elicited questions and concerns from in and around the banking sector, but none more than the treatment of single-family mortgages.
Trade groups representing banks and various parts of the mortgage industry have come out against the rules, as have housing affordability advocates. These groups say the impact of the proposed rule changes would be felt by the housing sector more so than the banks themselves.
“In the housing sector, which has just been in a sort of boxing ring getting punched, one after another, and getting exhausted from all that’s coming at them, this one is pretty incredible,” said David Stevens, a long-time mortgage executive who now heads Mountain Lake Consulting in Virginia. “We thought the current Basel rule made sense, but this one’s going to have downstream effects that are going to be very broad in the housing system.”
The change is expected to have at least a moderate impact on banks’ willingness to originate. While banks have been steadily ceding market share to independent mortgage banks and other nonbank lenders since the subprime mortgage crisis, they still play a key role in the so-called jumbo mortgage market, which consists of loans too large to be securitized and sold to the government sponsored enterprises Fannie Mae and Freddie Mac.
“The big, traditional mortgage lending banks have largely exited the field and that’s been going on for some time. This is the next nail in the coffin,” said Edward Pinto, director of the AEI Housing Center at the American Enterprise Institute. “This nail will make it harder for banks to compete with Fannie and Freddie, generally, and then take the one market they’ve had left to themselves, the jumbo market, and make it harder to originate because of the capital requirements.”
Some policy experts say the bigger impacts could come from the second-order effects of the regulation. In particular, they point to the treatment of mortgage servicing assets — the salable right to collect fees for providing day-to-day services to mortgages — as a change that could crimp the flow of credit throughout the housing finance sector and lead to higher costs being passed along to individual households.
“With potential borrowers already facing record high interest rates, steep home prices, and supply-chain issues, increased fees and scarcity of bank lenders could be another brick in the wall stopping Americans from obtaining meaningful homeownership and wealth creation,” said Andy Duane, a lawyer with mortgage-focused law firm Polunsky Beitel Green.
The proposal, put forth by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller on the Currency, notes that the rule change could result in second-order effects on other banks, but it largely focuses on benefits that large banks could enjoy relative to smaller banks as a result of the new rules. It notes that such risks are offset by a requirement that banks adhere to both the new framework and the existing one, to ensure they do not see their regulatory capital levels dip below that of the standardized approach.
Still, the regulators are aware that the change could have unintended consequences on the mortgage industry and housing attainability. Because of this, their proposal includes several questions about the subject.
“We want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers,” Fed Vice Chair for Supervision Michael Barr said while introducing the proposal in an open meeting last month. He added that housing affordability was one of “several areas that I will pay close attention to and encourage thoughtful comments.”
However, the proposal dismissed the idea that the new risk weights on residential mortgages would have a material impact on bank lending in that space. Citing various policy papers, academic studies and regulatory reports, the agencies assert that the risk-weight changes would lead banks adjusting their portfolios “only by a few percentage points.”
Stevens — who served as an assistant secretary in the Department of Housing and Urban Development in the Obama administration, a commissioner for the Federal Housing Administration and president of the Mortgage Bankers Association — said he is not convinced regulators have done sufficient analysis to rule out the type of sweeping, negative implications that he and others fear. He noted that the 1,087-page proposal includes fewer than 20 pages of economic analysis.
“I just don’t think they’ve thought through the downstream effects and the lack of analysis, in terms of actual financial estimates of the implications, is really concerning,” He said. “This will be a really big change, and that’s why you see everybody up in arms and the trade groups aligned against this proposal.”
Like other components of the bank regulators’ Basel III endgame proposal, the components related to mortgages would create standardized capital rules for large banks and do away with the ability for large institutions to use internal models. It also extends these requirements to all banks with more than $100 billion of assets, rather than only the largest, global systemically important banks.
The key provision in the package of proposed rules is the use of loan-to-value, or LTV, ratios to determine risk-weights for residential mortgage exposure.
The change could allow banks to hold less capital against lower LTV mortgages, though there is some skepticism about much of a reduction in capital that change will ultimately entail, especially for GSIBs that previously relied on internal models, said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association.
“Those risk weights aren’t published, so we don’t know what they are, but they are probably lower than 50% for low-LTV products,” Mills said.
The Basel Committee’s latest regulatory accord, which was finalized in December 2017, envisions LTV ratios as a means of assigning risk weights. But Mills said many in the mortgage banking space were caught off guard by how much further U.S. regulators went beyond their global counterparts. The joint proposal from the Fed, FDIC and OCC calls for a 20 percentage point increase across all LTV bands, meaning while mortgages with LTVs below 50% are assigned a 20% risk-weight under the Basel rule, the U.S. proposal calls for a 40% risk-weight. Similarly, where the Basel framework maxes out at a 70% risk-weight for mortgages with LTVs of 100% or more, the U.S. version has a top weight of 90%.
Under the current rules, most mortgages in the U.S. are assigned a 50% risk weight, so loans with LTVs between 61% and 80% would see their capital treatment stay the same, and any mortgages with LTVs of 60% or lower would see a lower capital requirement. Loans with an LTV of 80% or higher, meanwhile, would likely see a higher capital requirement.
“For GSIBs, that’s probably an increase in capital throughout the LTV rank,” Mills said. “For the rest, it’s a higher risk weight for higher-LTV mortgages and maybe slightly lower in other bands, but, in aggregate, that’s not good for the mortgage market. It’s a higher risk weighting for most mortgages.”
Approximately 25% of first-lien mortgages held by large banks began with an LTV of 80% or higher, according to data compiled by the Federal Reserve Bank of Philadelphia. Roughly 10% have an LTV of 90% or higher, while half were 70% or lower.
Mark Calabria, former head of the Federal Housing Finance Agency, said he is not surprised by the proposed treatment of mortgages, calling it a “natural evolution” of where regulators have been moving. He added that some elements of the proposal resemble changes he oversaw at Fannie Mae and Freddie Mac in 2020.
Calabria said mortgage risk is an issue in the financial system in need of regulatory reform, but he questions the methods being considered by bank regulators.
“I worry that they’re making the problem in the system worse by driving this risk off the balance sheets of depositories, which is probably actually where it should be in the first place,” he said. “I’m not opposed to them tinkering in this space they just need to be more holistic about it.”
The proposal also notes that the new treatment of residential mortgages is aimed at preventing large banks from having an unfair advantage over smaller competitors.
“Without the adjustment relative to Basel III risk weights in this proposal, marginal funding costs on residential real estate and retail credit exposures for many large banking organizations could have been substantially lower than for smaller organizations not subject to the proposal,” the document notes. “Though the larger organizations would have still been subject to higher overall capital requirements, the lower marginal funding costs could have created a competitive disadvantage for smaller firms.”
Yet, while regulators say the proposed rules promote a level playing field, some see it giving an unfair advantage to government-backed lenders.
Pinto sees the proposal as a continuation of a decades-long trend of federal regulators putting private lenders at a disadvantage to the governmental and quasi-governmental entities. He noted that if securities from Fannie and Freddie and loans backed by the FHA and Department of Veterans Affairs, which tend to have very high LTVs, are not given the same capital treatment as private-label mortgages, the net result will be the government playing an even larger role in the mortgage market that it already plays.
Pinto said despite these government programs targeting improved affordability, their provision of easy credit only drives up the cost of housing even further. He added that he hopes regulators reverse course on their treatment of mortgages in their final rule.
“They should just back off on this entirely. It’s inappropriate,” Pinto said. “They need to look at the overall impact they’re having on the mortgage market, and the housing and the finance market, and the role of the federal government, and the fact that the federal government is getting larger and larger in its role, which is inappropriate.”
The other concern is a lower cap on mortgage servicing assets that can be reflected in a bank’s regulatory capital. The proposal would see the cap changed from 25% of Common Equity Tier 1 capital to 10%.
Mills said the capital charge for mortgage servicing rights is already “punitive” at a risk weight of 250%. By lowering the cap, he said, banks will be forced to hold an additional dollar of capital for every dollar of exposure beyond that cap. He noted that regulators had raised the cap to 25% five years ago for banks with between $100 billion and $250 billion of assets to provide some relief to large regional banks interested in that market.
If the cap is lowered, Mills said banks will be inclined to shed assets and shy away from mortgage servicing assets. Such moves would force pricing on servicing rights broadly, a trend that would ultimately lead to higher costs for borrowers.
“MSRs are going to be sold into a less liquid, less deep market, and there are consumer impacts here because MSR premiums are embedded in every mortgage note interest rate,” Mills said. “If MSR values are impacted by this significantly, that rolls downhill through the system. An opportunistic buyer might be able to buy rights at a depressed value, but that depressed value flows through to the consumer in the form of a higher interest rate.”
The proposal will be open to public comment through the end of November, after which regulators will review the input and incorporate elements of it into a final rule. Between the questions raised in the proposal, the acknowledgement by Fed and FDIC officials that the changes could hurt housing affordability, and the strong negative response to the proposal, there is optimism that the ultimate treatment of residential mortgages will be less impactful.
“Nobody seems to be pushing for this, and nobody other than the Fed seems to like it,” Calabria said. “If I was a betting man, it’s hard for me to believe that this is finalized the way it is now in terms of mortgages.”
[CORRECTION: The story has been updated from an earlier version. The MBA announced $3.39 trillion in mortgage originations, and not $3.9 trillion.]
The Mortgage Bankers Association on Tuesday released revised estimates for the third and fourth quarter of 2020 and predicted record purchase volume for 2021. Although the MBA expects decreased refinancings in 2021 and a decline in overall origination to around $2.56 trillion, that would still be the second-highest origination total in the last 15 years.
The rebounding economy is likely to mean higher mortgage rates, with the MBA forecasting 2.9% by the end of 2020, rising to 3.3% by Q4 2021.
The MBA is forecasting a rise in purchase originations to $1.59 trillion, which would break the previous record of $1.51 trillion set in 2005. However, the MBA sees refinances decreasing to $971 billion.
“The housing market has seen a meaningful rebound since the onset of the pandemic,” said Mike Fratantoni, MBA chief economist. “Record-low mortgage rates have led to a surge in borrower demand for refinances and home purchases.”
For 2020, the MBA is estimating $3.39 trillion in mortgage originations – the highest since 2003 and a 50% increase from 2019.
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That includes an expected 91.5% jump in refinance originations to $1.97 trillion – also the highest since 2003 – and a forecasted 16% rise in purchase originations to $1.42 trillion, the highest since 2005.
Back in October, the MBA estimated total mortgage originations of $3.175 for 2020.
The median price of new homes in 3Q20 was reported at $330,600. That is expected to rise to $339,000 in 4Q20. However, existing-home price averages are expected to drop again in 4Q20, from $297,200 to $294,900. This continues the downward trend from 2Q20, when existing home price averages were at $309,200.
Other 2021 expectations from MBA include a growth rate of 3%, an unemployment rate of 5% by the end of the year, and an increasing 10-year treasury yield to 1.4% by Q4.