Black Knight Financial Services, Inc. observed an increase in the number of homebuyers who put less than 10% downpayments for the past 12 months, reaching a seven-year high. According to BKFS’s Mortgage Monitor Report for the period ended June 2017, these low-downpayment loans accounted for 40% of the total loans originated during the period.
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The Rise of Low-Downpayment Loans
Ben Graboske, executive vice president at BKFS, recognized this growth of purchase loans with less than 10% downpayments, with some going as far as below 5% in an accompanying statement:
“Over the past 12 months, approximately 1.5 million borrowers have purchased homes using less-than-10-percent down payments. That is close to a seven-year high in low-down-payment purchase volumes.
“The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low-down-payment loans have ticked upwards in market share over the past 18 months as well. In fact, they now account for nearly 40 percent of all purchase lending.
“The bulk of the growth has not been among the various three-percent-or-less down payment programs that have been reintroduced in the last few years, but rather in five-to-nine-percent down payment mortgages. This segment grew at twice the rate of the overall purchase market in late 2016, whereas lending with down payments of less than five percent grew at about the market average.”
Low Downpayments Then and Now
Mr. Graboske however clarified that this growth in low-downpayment purchase lending does not signify a return to earlier albeit risky practices involving lower downpayments leading to the mortgage crisis.
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He drew comparisons between low-downpayment loans made today and during the runup to the Recession. These differences have been found:
- Risk profile. Back then, 50% of all low-downpayment purchase loans had piggybacked second liens whereas today’s loans are high loan-to-value loans that are single lien.
- Mortgage products. The share of borrowers that put less than 10% in downpayment today is relatively similar to borrowers back then, but the mortgage products and their secondary risk characteristics vary. For one, majority of low-downpayment loans before the mortgage crisis were adjustable-rate mortgages. “ARMs are virtually nonexistent today among high-LTV loans,” Mr. Graboske said.
- Credit score. Today’s borrowers of low-downpayment loans have credit scores that are higher by 50 points from those with high-LTV ratios in 2004 to 2007. Credit scores on GSE loans having downpayments below 5% are also higher by 60 points today.
- Delinquency. The default rate among today’s high-LTV mortgages was found to be much better than their counterparts back in 2005 and 2006 thanks to an improved borrower risk profile.
GSEs Overtake FHA/VA in Making Purchase Loans with Low Downpayments
BKFS’s Mortgage Monitor Report revealed that Fannie Mae and Freddie Mac have increased their share of purchase loans with low down payments, overtaking the historical source of such lending, FHA/VA.
Both GSEs took more than 10% of total “sub-five-percent-down” purchase loans originated in all of 2016 and early 2017 – their largest share so far since early 2008. More than 25% of all GSE purchase loans were made to borrowers with less-than-10-percent downpayments, which is indicative of a change in purchase lending landscape among GSEs.
While FHA/VA’s market share has slowed down as noted above, the government agencies continue to hold 80% share of purchase loans with below-five-percent downpayments.
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