How Developers Can Reduce Mortgage Policy Risk
Changes in underwriting requirements coming in 2021 could mean that even fewer people can afford to buy homes.
There is a new risk on the horizon for homebuilders. The qualified mortgage patch, which currently exempts Fannie and Freddie from Dodd-Frank’s 43% debt-to-income ratio cap, will expire. According to John Burns Real Estate Consulting, the change could impact as much as 14% of the mortgage market and could remove some would-be homebuyers from the market altogether. It could also put homebuilders at risk.
“The main risk is that a portion of home buyers that could qualify for a mortgage under the qualified mortgage patch may not be able to after January 2021 given the changes in underwriting requirements, namely Fannie Mae and Freddie Mac no longer allowing 43%-plus debt-to-income ratios,” Rick Palacios Jr., principal and director of research at John Burns Real Estate Consulting, tells GlobeSt.com.
Interestingly, emerging markets are the most impacted by the expiration of the qualified mortgage patch. Phoenix is at the top of the list, along with markets like Tampa and Orlando Florida, Charlotte, North Carolina, and Las Vegas. “For illustrative purposes we are calling attention to some of the larger housing markets in the country, given those markets generate more sales for our clients,” says Palacios. “For example, Phoenix had ~24k single-family permits in 2018, making it the fourth biggest housing market for new home construction last year.”
There are many ways for homebuilders to mitigate risk. “We’d suggest identifying projects where the mortgages required exceed 43% debt-to-income and sales prices of homes require loan limits exceeding FHA,” says Palacios. “Builders could strategically sell through some of these communities before January 2021, especially if most buyers are using high DTI loans at loan limits above FHA.”
In addition, Palacios recommends steering clear of markets where homes fall in the gap range between Freddie/Fannie and FHA. “Builders could also hold off on land purchases today where homes would fall in this loan limit price gap range, or at least consider the additional risk before purchasing the land,” he says. “Lastly, builders should broaden their range of mortgage providers to include non-Qualified Mortgage lenders who can replace those who underwrite for Fannie and Freddie.”