April 30, 2014

Declining affordability in certain cities could undermine loan origination and impact loan sales

Homes values have been rising in several different metropolitan areas, and now many properties have prices that exceed the conforming loan values set forth by government programs.

This situation has combined with tight lending standards to hamper consumers' ability to buy homes, according to the results of an analysis conducted by online real estate firm Trulia Inc.

Specific areas have high amount of expensive homes
Certain areas - specifically those in California and the Northeast - have been particularly hard-hit. In the San Francisco metropolitan area, 61 percent of homes up for sale are higher than the local conforming loan limit of $625,500.

In areas like Boston and the surrounding suburbs, 30 percent of properties are in the same boat. The same number of homes have this status in New York and the close-by suburb of Fairfield County, Connecticut.

Some areas - such as Texas - had a far lower portion of homes with prices above conforming loan limits, according to The Wall Street journal. In El Paso, Texas, only 2 percent of properties surpassed this level. Buffalo had a slightly higher amount, at 4 percent.

The Trulia report noted that consumers who buy homes in more expensive markets are not necessarily wealthy. Census Bureau data shows that these individuals generally spend a higher share of their income on housing expenses.

Conversely, figures supplied by the government agency revealed that homeowners who have homes with prices close to the conforming loan values make far more in Houston than they do in San Francisco. The median household income of these households in the first city was $120,000, while the income in the second was $170,000.

People who want to get around these challenges can potentially obtain jumbo loans, the media outlet reported. The problem is that these lines of credit frequently come along with higher borrowing costs. In addition, obtaining them frequently requires a higher down payment and stronger credit.

Current situation could constrain loan sales
The situation the nation is facing now - with many major metropolitan areas having a large number of homes that surpass conforming loan values - could undermine loan sales.

Fannie Mae and Freddie Mac are unable to purchase mortgages that exceed the conforming loan values for different areas. Financial institutions are only securitizing a very small number of non-government mortgages.

These developments could constrain loan sales by undermining the new supply of mortgage debt.

Many banks are harnessing creative solutions to circumvent these challenges, for example providing borrowers with a mortgage through Fannie Mae that meets their conforming loan limits, and then arranging for a second mortgage to make up for the entire principal.

Financial institutions that want to get involved with loan sales might consider contacting Garnet Capital Advisors, which has significant experience in this particular area.