Homebuilders are looking for the FHFA to ease credit standards on Fannie Mae and Freddie Mac mortgages to help improve new home sales.
Homebuilders are looking for the FHFA to ease credit standards on Fannie Mae and Freddie Mac mortgages to help improve new home sales.

Homebuilders are hoping the new Federal Housing Finance Agency director will be able to carry through with his promise to improve liquidity in the single-family mortgage market and increase access to credit.

New home sales have been lackluster lately and tight credit continues to be a drag on the housing recovery.

In a May 13 speech, FHFA director Mel Watt pledged to take a number of steps to reduce repurchase risk on Fannie Mae and Freddie Mac loans and provide lenders with greater clarity regarding the GSEs' underwriting standards. The former North Carolina congressman was confirmed by the Senate in December and took over from FHFA acting director Edward DeMarco in early January.

Homebuilder Ara Hovnanian praised the GSE regulator's new approach during a conference call Wednesday to discuss his company's fiscal second-quarter (ending April 30) results.

"Mel Watt has a more positive attitude toward housing and the need to return to rational lending than his processor. That is a helpful thing," said the chairman, president and chief executive of Hovnanian Enterprises.

The Red Bank, N.J.-based builder had very good sales in March, which was partially due to promotions. But Hovnanian's sales in April and May were "choppy," according to the CEO. "We remain convinced we are still in the early stages of the housing industry recovery," Hovnanian told investors and analysts on the call.

Hovnanian completed 1,331 home sales in the second quarter, down 6.5% from a year ago. The average sales price in the second quarter was $267,400.

Builders have noticed some easing in credit standards recently, but not enough to make a real difference.

Hovnanian Chief Financial Officer Larry Sorsby said some credit overlays have been removed, which improves borrowers' ability to qualify for Fannie and Freddie loans.

"But it has only been very recently that we have seen that happen," Sorsby said. "The aggregators — Wells Fargo and JP Morgan — have seen their business slow. Therefore, they are hungry."

The homebuilder's lending unit, K. Hovnanian American Mortgage, financed 64% of its noncash buyers in the second quarter, with an average borrower credit score of 747.

Fast-growing builder LGI Homes, which focuses on first-time homebuyers, completed 228 home closings in May, up 60% from a year ago. In reporting its first-quarter results, LGI Chairman and CEO Eric Lipar noted that he was "excited" to hear Mel Watt's comments.

"We have seen a slight easing of credit over the last quarter or two, but nothing substantial," Lipar said on May 15. "Any easing of credit for the first time homebuyer would directly result in increased closings for LGI."

LGI Homes, based in The Woodlands, Texas, completed 485 closings in the first quarter ending March 31, up 92% from a year ago. The average sales price was $156, 500.

D.R. Horton, one of the nation's largest homebuilders, is planning to enter the first-time homebuyer space. President and CEO Don Tomnitz told a Wells Fargo construction conference that his company could build to a $150,000 price target and grow that side of its business.

"We truly believe the next leg up in the housing industry is the first-time homebuyer," Tomnitz said at the May 7 conference. In two or three years, "it could be 20% of our revenues," he added.

D.R Horton reported net sales orders of 8,570 in the second fiscal year quarter (ending March 31), up 9% from a year ago. The average sales price was $278,900. The Fort Worth, Texas-based builder also has subsidiary businesses for mortgage lending, DHI Mortgage, a title company, DHI Title, and homeowners insurance, D.R. Horton Insurance Agency.

Traditionally, first-time buyers have relied on low-downpayment FHA loans. But the Hovnanian CFO noted there has been a real shift in the market from Federal Housing Administration-insured mortgages to more affordable Fannie and Freddie loans.

FHA loans have been "disadvantaged," Sorsby said, due to increases in FHA mortgage insurance premiums over the previous three years. The premium hikes were needed to ensure the solvency of the FHA mortgage insurance fund, and borrowers currently pay a 1.75% upfront fee and a 1.35% annual fee on FHA-insured single-family loans.

"Our percentage of FHA loans was 16% in the second quarter," Sorsby said. "This is down from a high 38% of FHA originations in fiscal year 2010," Sorsby said. "Those buyers that can qualify for Fannie or Freddie loans have switched to that," the CFO said.

GSE lenders also complain about the loan-level price adjustment fees that Fannie and Freddie charge borrowers. They are hoping FHFA Director Watt will lower the LLPAs fees, which were initiated following the housing crash when unemployment was rising and foreclosure rates were high.

FHA purchase mortgage originations fell 24% in the first quarter (ending March 31) from a year ago, according to a recent agency report. Lenders originated nearly 120,000 FHA-insured purchase loans in the first quarter, down 21% from the prior quarter. The agency report also shows that the average credit score of FHA borrowers declined two points in the first quarter, to 683.

"Mortgage credit loosened somewhat in May, partially as a result of a slight increase in the availability of jumbo loans," according to a June 5 Mortgage Bankers Association report. "Another component was the action by some investors to lower credit score requirements on FHA loans."

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