About The “Credit Is Too Tight” Meme (Freddie Mac Average LTV and DTI The Same In 2001 and 2013)

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Originally posted on Confounded Interest - Online Course Notes For Financial Markets:

Logan Mohtashami did an interesting interview with David Lykken (not to be confused with the Lycans from the Underworld movie series). The title of the interview is “Slaying The Tight Lending Myth.”

Here is another piece to the puzzle.

Freddie Mac distributes their loans on line since 2000. So following my interview with Diana Olick on CNBC, I thought I would look at loan-to-value ratios and debt-to-income ratios from Q3 2001 and Q3 2013 (the latest quarter released to the public).

The results? The average loan-to-value (LTV) ratio is Q3 2001 was 75.91 percent. The average LTV in Q3 2013 was … 75.84 percent. Looks pretty similar to me!


How about average debt-to-income (DTI) ratio? 33.57 percent in 2001 and 33.63 percent in 2013. Once again, they look pretty similar to me!

The credit is too tight meme is way overblown. It’s really an “Income to too low” meme.

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Interview With David Lykken: Slaying The Tight Lending Myth

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Trying to prevent the sickness of a financial engineered housing recovery.

My segment starts around the 40 minute mark


“All truths are easy to understand once they are discovered; the point is to discover them.”
Galileo Galilei


Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Tight Lending And Other Urban Legends



As many of my readers may be aware, my mantra since 2010 has been that “We simply don’t have enough qualified home buyers in American, once you take away the cash buyers, to have a real economic recovery in housing “. While some may be tired of this refrain, there remain a number of highly respected housing “gurus” who continue to profess that it is unfairly tight lending standards, not the lack of qualified buyers that are suppressing a housing recovery. The difference is not academic.

Would-be home purchasers are unable, to qualify for a mortgage due to the following factors:

They lack adequate monthly income. A lot of the jobs created, post-recession, are low paying jobs that don’t provide adequate income to support a mortgage payment. More liberal lending standards will not correct this.

They lack liquid assets. The down payment (even just 3% for some loans) and closing cost for a home purchase exceeds many American’s available liquid assets.

There is no financial bubble. The formal definition of a financial bubble is an economic cycle characterized by a surge in asset prices above the fundamental value of the asset. The housing bubble created excess demand based on poor lending standards. When the bubble popped, that excess demand disappeared. Not all the demand was fake in that cycle, however. In fact a good portion of it was real. It would be a drastic mistake to attempt to manipulate lending standards in an effort to recreate that extra fake demand. If historically low interest rates cannot generate home ownership demand, then we need to accept that a percentage of our adult population is simply not in a financial position to take on mortgage debt.

Demographics are not favorable in this cycle, but in time they will be. Household formation has been very soft. People are staying single or getting married older. This translates into lower housing ownership demand as most people will wait to marry before considering a home purchase. Fewer dual income households so fewer households that can afford a mortgage payment. These factors have driven strong demand in the rental market

Still think tight lending  is preventing a housing recovery? A quick review of the requirements for some of mortgage loans available may surprise you.

No money for a down payment? Is zero down too tight?

VA (Veterans Administration) loans require no down payment, a minimum FICO score of 620 and allow up to 60% debt to income ratio. I don’t think anyone could call this tight.

Poor credit score? Is a FICO score of 560 too high? FHA (Federal Housing Authority) loans require a FICO score of 560 to 620. (Scores of 650 are considered “fair and below 600 are considered poor or high risk). Other requirements include at least 3.5% down, and a maximum debt to income ratio of 43%. In some cases they will accept up to 50% debt to income ratio.

High debt to income ratio? Is 50% debt to income ratio too stringent? GSE (Government Sponsored Enterprise) loans allow for 43% to up to 50% debt to income ratio in geographical areas where housing is particularly expensive. A minimum FICO score of 620 and a 3 % down payment is also required.

Other common requirements for these loans are a history of the same line of work for the past 2 years, 4 weeks of consecutive pay stubs to verify income, most recent W2, and most recent 2 months bank statements.

Home loans are available and home loans are being made. Over 4 million purchase home loans were given to Americans in 2014 and thankfully those were largely to folks who have the financial capacity to own the debt the home ownership.

One of my 2015 housing predictions was that we would see 5%-10% total growth in mortgage purchase applications due to the low bar set last year.

This is the most recent data line from Professors Antony Sanders supports this predictions


We are now seeing above 5% total growth, year over year, for 2015 mortgage purchase applications.

As you can see below, mortgage purchase applications are still well below the pre-housing bubble years.


For 2015, I predicted year over year growth in all housing metrics, demand is improving. Having said that, even if cash buyers continue to make up a larger than “normal” percentage of home buyers, total existing home sales will still be soft – so we have a ways to go to get back to a normal healthy market.

All housing analysts, I would surmise, would like to see a more robust housing market. Where we disagree is what should be done to encourage a healthy market. I believe we have a moral obligation as a society to reject attempts to engineer conditions that encourage people to put themselves in economic peril. We did that before, it was a disaster and we must learn from our past mistakes.

I have to believe that those who are saying lending is too tight are either not aware of the actual requirements and have absolutely no lending experience or have some other agenda that is preventing them from acknowledging the obvious. Gotta wonder. Frankly, I also gotta wonder why we keep listening to them.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Will Spring Home Sales Fall Flat?


Mortgage Purchase Applications

Last year (2014) we had double-digit declines in mortgage purchase applications year over year, even with falling interest rates .  So far this year, as we are in month three, demand has been flat, year over year, to slightly higher, but it is not meeting my expectations of 5-10% growth, which would still be quite modest since we are comparing it to a 21st century low set in 2014. Interest rates are lower this year as the 10 year yield got near to my predicted 1.60% level with a 1.64% print in 2015.  The low rates however, haven’t created increased mortgage demand.

Mortgage Purchase Applications and Mortgage Rates Declines Since 2007 (credit  Professor Anthony Sanders)


Today’s mortgage purchase applications number showed 3% year over year growth, which is a start.  But better than 3% growth is  needed to  improve the market from the 21st century low set in 2014. There are still a few more months in the spring selling season to make up for our slow start in 2015 but by June the season will be over and mortgage purchase applications will start their traditional seasonal decline in volume.

Existing Home Sales

Existing home sales, so far this year, are showing year over year growth but since last year sales were so soft, this is not necessarily evidence of a healthy market in this sector. Cash buyers are under 30% for the first two months of this year, whereas in January and February  of 2014 they were 33% and 35% percent of the market, respectively.  Cash buyers have been holding up the housing market with their “over-participation”. Now that we are seeing fewer cash buyers  mortgage buyers will need to pick up the slack in order to have growth in this segment.  I predict a slight year over year gain for total existing home sales as long as cash buyers stay in the market with their current participation rate. We have just started the spring selling season so we will need to see a strong uptick in the Seasonally Annual Adjusted Rate of Sales (SAARS)  in order to achieve over 5.4 million peak sale for the year.

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First Time Home Buyers

We’ve heard a lot of hype about first time home buyers making a comeback in 2015 to pick up this slack and drive overall growth in the market.  But the painful truth is that first time buyers  are  still below 30%  of the market (last year they were 29% of the market) whereas in a healthy market we would expect them to make up about 40% of the market. Household formation numbers are improving which is the first step in the social cascade that leads to home purchase. Rent , date, mate, marry, 3.5 – 6 years after marriage home purchase, is the social sequence we need to improve this segment.
Our biggest age group in America is the 23 -25 demographic.  They will need some time to mature into  first time purchasers.

New Home Sales

After a huge miss in sale expectations in 2014, new home sales are showing growth in the first two month of the year.  The numbers reported are confounded with large margins of error but do show upward momentum. I expect total growth of 8%-12%, year over year, for this sector, but keep in mind this makes up only about 10% of total home sales.  Builders could potentially generate more sales if they were willing to incentivize the middle-income buyer instead of focusing only on the wealthy buyer. We saw some growth in 150K -$299K price range, but a large percentage of sales still, are in the over $400K range.



So what can we look for in the Spring of 2015 for housing?  Mortgage purchase applications are flat to slighter higher, existing home sales look to be  slightly higher for the total year number.  New home sales are showing  double-digit growth but are still tilted toward the upper income home level and make up only a small part of the overall market.

These metrics are no surprise to me because my core thesis since 2010 has been that we don’t have enough qualified home buyers in America (once you remove the wealthy cash buyers) to drive a normal healthy market.

Added proof of this is that the Federal Reserve’s emergency interest rate policy of zero percent is still in place seven years into this economic cycle. The 10 year note is below 2%, a low which hasn’t been seen since 1941-1945..  These facts demonstrate that the Fed does not believe we have fully recovered no matter what they verbalize to the market place. In fact mortgage rates have been below 5% since early 2011 and so has the zero interest rate policy  but this has not driven strong mortgage  demand from Main Street.


Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Interview With Joe Fairless On The Rental Demand In America

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Starting at 1:50

Prime takeaway, demographics equal rental demand for years to come



Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Bloomberg Financial Interview: Housing 2015 & The Truth About Demand

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A key emphasis this year.

If cash buyers went back to their normal historic %, then both 2013 & 2014 existing home sales would be at the lowest level of this economic cycle.
We are talking about year 5 & 6 in this economic cycle not the first few years coming out of the recession. This troubling trend is why mortgage demand needs to grow to keep sales from falling more as total cash volumes continue to dwindle slowly.

Starting around the 1:50 mark

From Professor Anthony Sanders

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com

Gauging Housing Demand for the Spring of 2015 – Caution in the Wind



2014 was unique but predictable in regard to mortgage demand  for purchase applications. Looking back on the data now, it was down every single week of the year, year over year,  and negative by double digits every week except for four weeks. The good news ( cough cough) is we have pulled ourselves out of the morass that was 2014 and the New Year is upon us.

Comparatively speaking, my outlook for purchase applications is not as negative this year. My 2015 housing predictions include at least 5%-10% growth, year over year, in purchase applications. This is primarily due to having such a low bar in 2014.

Because we experienced 21st century lows in mortgage purchase applications in 2014 and we are now in the 7th year of this economic cycle with employment to population rising, it is not a stretch to expect at least 5%-10% year growth in this purchase applications in 2015. Of course, year over year growth in purchase applications doesn’t mean a recovery when we experienced such low numbers in 2014.  Expect housing bulls to highlight the year over year growth without adding the appropriate context.

Let’s remember the 2014 bar for housing metrics is low as is shown in this graph from Anthony Sanders.


With regards to interest rates,  the ten-year note is near my predicted low-level range of 1.60% , keeping mortgage rates near the lowest rates of this economic cycle. If the 1.60% level breaks lower, expect a new low print of 1.34%.

However, if I am wrong and we don’t see any growth in 2015 purchase applications and existing home sales stay flat or even go negative, then we will need to admit that home prices have surpassed peak affordability in relation to income capacity. We know this is true for some areas of the country already. The rich can only buy so many homes and there hasn’t been strong household formation to drive first time home-buyer demand. No matter how low rates go, no matter how many jobs are created, no matter what all the king’s horses and all the king’s men try to do… if we don’t have and uptick in household formation  and see wage growth, we will not have a true housing recovery.

From now to the end of March we should see  some positive year over year prints. By the end of March we will be able to tell how the rest of the year will shape up. I expect existing home sales to benefit from the massive price inflation we saw for new homes in the past few years.  In 2015 builders are unlikely to cut prices in order to be competitive with existing homes.  New home sales only make 1/10th of  total sales though, so the buyer switch from new to existing homes will only have a marginal impact in total home sales.

I expect our prime middle class mortgage buyers to move forward with caution, to be price sensitive and budget conscious and thus drive a trend toward the purchase of older less expensive homes which will marginally help the total existing home sale numbers . And to that rejection of builders over pricing homes I say “Bravo”!

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com