Home ownership continues to be a foundational pillar for building personal wealth. However, the home purchasing process is increasingly strewn with obstacles, as prospective buyers grapple with mounting challenges—soaring interest rates, the spectre of inflation, and the capricious nature of housing inventory. According to the Mortgage Bankers Association’s loan application survey, there has been an 81% decline in the Refinance Index and a 39% decline in the Purchase Index in the past 18 months.¹ The survey also showed, “the number of mortgage applications during the week ending June 30 dropped 4.4% from the previous week, and when compared to the same period last year, application activity plummeted more than 32%”.²  Amidst this landscape, new mortgage products have emerged this year led by Rocket Mortgage and United Wholesale Mortgage, whose initiatives are designed to kindle demand and reverse these disheartening trends. By curbing upfront costs and income prerequisites, these programs aim to reinvigorate the trajectory of aspiring buyers toward home ownership.

While Rocket Mortgage (RM) came out with ONE+ program to compete with United Wholesale Mortgage’s (UWM) “Conventional 1% Down” offering, there are key differences between these products. For instance, there is no limitation on the amount of assistance RM can provide (2%) when borrowers make a down payment of 1% of the home purchase price, with a maximum of $350,000. In contrast, UWM caps their 2% contribution to up to $4,000 as a grant when income-qualified borrowers put down 1%.³ Additionally, RM’s ONE+ program covers private mortgage insurance (PMI) at no cost to the borrower while UWM’s “Conventional 1% Down” loan product does not. Lastly, RM works directly with homebuyers as a lender whereas UWM is a wholesaler that works alongside independent mortgage brokers to provide more loan options to customers.

Other lenders have similar programs in place such as Citi’s “HomeRun Mortgage Program” and Chase’s “Dreamaker Loan” which cater to low-to-moderate income customers and extend similar features such as unrestricted availability to existing homeowners, low-down payments, and covering PMI payments. As for the government-backed entities including FHA, VA, and USDA, their low-down payment mortgages market the need of credit score minimums, usually ranging from 580-620 depending on the backer, as well as more stringent debt-to-income ratios. No matter the provider, lenders are clearly seeing the value in these products to increase their customer bases. However, given the economic environment, it will be essential for lenders to properly manage these programs – especially in scenarios when widespread loan default is imminent – so returns can be maximized.

Lenders must also remain cognizant about stabilizing risk appetite while understanding the broader market implications of 1% programs as they compete to boost loan originations. Simply put, pursuing these goals without caution could lead to long-term consequences. Just as in the prelude to the 2008 subprime mortgage crisis, an unchecked push for originations and overexposure to low-income borrowers—these programs' target demographic—could have lasting effects. Some parallels to that time are reemerging, including the oversight of prospective homebuyers' creditworthiness as fee-reliant lenders prioritize income generated from new home loans. This is evident in challenging market conditions, where Redfin's recent data shows a mere 1% of U.S. homes changed hands in the first half of this year, compared to 19 out of 1,000 homes in 2019. Despite the difficulties posed by rising housing prices and interest rates, effective controls and risk mitigation for 1% mortgage offerings might save lenders from significant losses.

For instance, putting more comprehensive due diligence in place that requires data systems alignment to key risk indicators should a priority for lenders. A data point such as underlying collateral location for a mortgage application could be leveraged to better understand fair market value in emerging and declining markets. This is true especially in areas where median income is disproportionately lower than average home value because borrowers in these areas are typically more susceptible to face barriers to repay loan obligations. Conversely, in thriving neighbourhoods where housing inventory may be tighter and median income is stronger, applicants in these markets have conditions where recovery is more likely and underwater mortgages less likely. Another consideration is implementing stricter lending criteria when rolling out 1% down mortgage products accompanied by expanding data systems and attributes that can be tied to a prospective Borrower for improved underwriting.

For Servicers, much of the same analysis is important as adequately assessing risk as part of due diligence processes will be important to understand the exposure of mortgage portfolios. As it pertains to these 1% mortgage products, accurately defining and scoping the loan terms and characteristics of these products will be crucial, especially during times of acquisition from third parties’ servicers and investors alike. In economic downturns, and especially as mid-sized banks are facing heightened capital requirements from the Feds and increased pressure from regulators to maintain healthy balance sheets, loan selloffs are likely to uptick. However, sustainable lending activity is needed now more than ever as banks need to highlight liquidity. Billions of dollars continue to leave the US Banking System, and the Federal Reserve predicted in its annual bank stress test that “more than half a trillion dollars could exit the U.S. banking system in a ‘severely adverse’ scenario.”⁴

In summation, effective data management is key for lenders to navigate the pros and cons of 1% down mortgage products. Learning from the past, it is crucial to prevent situations seen in the subprime era, where over-leveraging led to defaults due to borrowing against inflated property values. Modern lenders need confidence-inspiring approaches for borrowers, coupled with robust strategies to optimize returns and control risks through meticulous data management.

Capco has an award-winning data management practice, adept at aiding clients across the mortgage sector. Our prowess lies in crafting effective strategies and controls that empower clients to flourish within volatile markets. From enhancing data quality to collaborating on analytical tools informing loan strategies, we wield domain expertise in automating programs that overhaul mortgage origination and servicing. With a demonstrated history, we excel in identifying and rectifying pivotal inefficiencies, pivotal for driving cost savings and operational prowess.

REFERENCES

¹ https://www.mortgagenewsdaily.com/data/mortgage-applications#chart-apps-purchase-vs-refinance
² https://www.forbes.com/advisor/mortgages/mortgages-07-06-2023/
³ https://www.uwm.com/price-a-loan/exclusives/products/conventional-1down
⁴ https://www.benzinga.com/news/23/07/33333530/heres-how-78-billion-exited-the-us-banking-system-in-just-one-week