MANY HOMEOWNERS HAVEN'T been content to watch the dramatic run-up in value of their homes. Instead, they've cashed out, pouring that equity into other purchases, including renovations and down payments on second homes.
The rapid growth of home-equity loans—which grew from $492 billion in 2000 to $881 billion in 2004, according to the Federal Reserve—prompted a closer look by bank regulators, including the Fed, the FDIC, and the Office of the Comptroller of the Currency. The regulators found that the growth in the loans was sometimes accompanied by less attention to risk management practices and looser underwriting standards, the criteria used to qualify applicants.
In May, the regulators issued home equity loan guidelines to banks, thrifts, and credit unions, warning lenders to pay closer attention to the risk associated with the loans and the effect a rise in interest rates could have on homeowners' ability to make payments. They directed particular attention to interest-only loans, loans generated through brokers, applicants with lower credit scores, and so-called “no-doc” loans, which require little or no documentation of a borrower's financial situation.
“The banks have a lot of money to lend. There's always a temptation in that kind of environment to loosen underwriting standards,” says Kevin Mukri, a spokesperson for the Office of the Comptroller of the Currency. “None of these products are bad, they just need to be underwritten well.”
Next on the regulators' agenda: guidance for mortgage originations, due to the vast array—and popularity—of new, potentially riskier, loan products. Interest-only loans accounted for nearly a quarter of new mortgages in 2004, and Alan Greenspan, chairman of the Fed's Board of Governors, recently testified before Congress that the prevalence of those and “other relatively exotic forms of adjustable-rate mortgages are developments of particular concern.”
The regulators have not indicated when they may release the new guidelines, but Doug Duncan, vice president and chief economist of the Mortgage Bankers Association, says he isn't surprised they are considering them. “It makes sense, because there isn't an established track record for the performance of the product type. The regulators' view is that it requires more diligence up front, so [the lenders] understand how it will perform.”
REACHING THE BAR: Residential construction activity continued to defy projections in May, as the annualized rate of housing starts topped the 2 million mark again. Single-family starts continued to rebound from a dip in March.
FUELING THE FIRE: Rates on 30-year fixed mortgages dropped yet again, helping buyers continue to afford to purchase more-expensive homes. Adjustable rates inched barely higher.
BAD NEWS, GOOD NEWS: Overall consumer confidence slipped again in May, but buying conditions for houses rebounded as more respondents said it's a good time to buy.
MIDWEST MOVES: The Midwest won for growth in starts in May, with total and single-family starts up 18.7% and 22%, respectively. Total starts in the region are 6.1% ahead of May 2004.
PRICING PRESSURE: After decelerating in March, home price appreciation picked back up again in April. New-home prices were up 3.8% year-over-year.
KEEP THE PACE: Though the Census Bureau revised sales figures back to January 2003, new-home sales continued on another record-setting pace in April.
DIP DOWN: The number of building permits pulled receded a bit in May from April but remained well above 2 million. Single-family permits are down 2.5% from the same time last year.
HITTING A HIGH: Builder confidence climbed to its highest point of the year in June, buoyed by greater expectations for sales over the next six months.
MAKE A DEAL: Lumber and panel prices moved in tandem once again. Costs for both were down compared with June 2004.
SOURCE: U.S. CENSUS BUREAU
SOURCE: FREDDIE MAC
SOURCE: UNIVERSITY OF MICHIGAN SURVEYS OF CONSUMERS
SOURCE: U.S. CENSUS BUREAU
SOURCE: FREDDIE MAC
SOURCE: U.S. CENSUS BUREAU
SOURCE: U.S. CENSUS BUREAU
SOURCE: NAHB
SOURCE: RANDOM LENGTHS
