Some 19 percent of borrowers who owned a home in 2007 no longer qualify for a mortgage based on payment history alone, according to testimony from Laurie S. Goodman, a Senior Managing Director at Amherst Securities Group LP.
Goodman explained to a Senate banking subcommittee that of the 55 million homeowners with a mortgage in June 2007, five percent have defaulted and another 14 percent reached 90+ day delinquency status.
As a result, they can’t qualify for another mortgage anytime soon.
Additionally, many others have been shut out of the housing market thanks to harsher loan-to-value (LTV) ratio and credit score constraints.
Gone are the days of zero down mortgages, at least for most.
In fact, for the 2009/2010 loan origination vintage, the average LTV ratio was a very conservative 67 percent, while the average FICO score was a very excellent 762.
At first glance, it looks like good news because it reveals that most newly originated mortgages have gone to more sound borrowers.
But upon closer inspection, it means a ton of lower income and less creditworthy borrowers are missing out on homeownership during perhaps a good entry point.
Clearly, this is adding to the glut of housing inventory, while presenting a dilemma. Do banks and mortgage lenders ease standards to promote buying? Or will that create the same problem all over again?
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Goodman thinks she has a solution. Investors, ironically. She wants them to buy up the distressed properties in big blocks (including foreclosures and non-performing loans) and rent them out to the existing owners.
Of course, these disgruntled homeowners would have to agree to stick around in a property they no longer own. That’s a hard pill to swallow to be sure.
And investors would have to hold 80 percent of the properties off the market for a minimum of three years before flipping them.
This, she believes, would stabilize the housing supply/demand imbalance.
In effect, the housing overhang would be reduced and downward pressure on home prices would ease.
As a result, fewer homeowners would hold underwater mortgages. This is pretty important, as she and her firm have determined that LTV is the number one driver of default.
Additionally, loan servicers would need to get more aggressive on their loan modifications by offering principal reductions, something that has proven to be a sticking point for years now.
Without action, her company estimates nearly one out of every five borrowers is in danger of losing their home. That represents about 10.4 million homeowners.