There was another strong Employment Situation Report in May, with more than 200,000 new jobs. Wages, which have stubbornly stable, rose as well and that has economists worried. They see the looming specter of inflation which means further and faster Federal Reserve rate hikes.
Interest rates extended last week’s declines and mortgage applications were quick to respond.
It may seem like mortgage credit is still tight, but a CoreLogic study indicates some small changes in underwriting standards are opening the market to new borrowers.
The May Employment Situation Report came in strong with 223,000 new jobs, 25,000 of them in construction which bodes well for increasing home starts. The unemployment rate ticked down another 0.1 percentage point to 3.8%, essentially full employment.
Further, the tightening labor market is beginning to affect wages; they rose 0.3% from April and are up 2.7% year-over-year.
The lack of wage growth post-recession has been troubling economists for several years, raising the specter of unsustainable housing prices, fading consumer confidence, and perhaps a slowing GDP. May must have erased all the angst, and everyone is happy.
Wait, what? Oh, silly us. We forgot these are economists we are dealing with. Now that wages are rising they are growing concerned about wage inflation. Econoday, in reporting the employment figures says, “The results clearly support expectations for a rate hike at this month's FOMC.”
Next week will prove them right or wrong.
And speaking of rates, last week’s 10-basis point (bp) downturn in 30-year mortgage rates was extended this week with an additional 2 bps decrease. Sam Khater, Freddie Mac’s chief economist said the decline drove a 4% increase in purchase mortgage applications. Treasury yields however have almost completely recovered from their dive. The rate retreat was credited to political turmoil in Italy.
LTV & DTI Raised
Mortgage credit is still considered relatively tight, but some policy changes by the GSEs Fannie Mae and Freddie Mac are now being reflected in the profile of conforming loans. The first, an increase to 97% in the loan-to-value (LTV) ratio for loans the GSEs will acquire, was initiated by Fannie Mae in late 2014 and adopted by Freddie Mac a few months later. Then last July Fannie raised its allowable debt-to-income ratio from 45% to 50%.
CoreLogic’s Archana Pradhan says there has been only a nominal increase in the share of high LTV loans, from less than 2% before the change to 9% today, but the higher acceptable DTI, in effect less than a year, has had a significant impact. The share of loans to borrowers with DTIs in the 45 to 50% had held steady at 5% to 7% since early 2012 but jumped to 20% of loans originated in the first quarter of 2018 and pushed the average DTI up 2 points to 37% year-over-year.
What hasn’t changed is the third major credit risk factor, credit scores. The average score held steady year-over-year at 755 and is 50 points higher than the average score in the “safe” 2001-2 lending era. This reflects the GSE’s concerns about the high cost of servicing delinquent loans.
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