Are Millennials Mortgage-Ready?

Editor's Notes

1. Thank the audience for attending. Excited to be here Renae Sherman Director of Data Strategy for the consumer credit bureau Responsible for the development and execution of EXP’s mortgage strategy Joined EXP 12 years ago Held various positions in portfolio management and Public Sector Cindy Waldron Director of Research Analytics and Modeling in the Single-Family Affordable Lending and Access to Credit org at FMAC Responsibilities include researching the evolving needs of affordable and underserved markets and providing support to new affordable offerings, programs and services Veteran of over 20 years in the mortgage industry Joined FMAC in 1999 Held various leadership positions w/in Single Family Modeling and Analytics and Single Family Affordable Lending & Access to Credit areas
2. Hispanics and Millennials are the fastest growing populations of potential home buyers. Millennial population continues to grow and has surpassed other generations Expected to be over 80M Millennials strong by the year 2050 According to the US Census Bureau, the Hispanic population is projected to have close to 133M individuals by the year 2050 representing a 255% increase over a 40 year span starting in 2011 Both populations represent a tremendous opportunity for the mortgage industry
3. Deeper dive Review statistics Populations are growing at a staggering rate and represent the largest percentage of future homebuyers During this session we will focus on answering the following questions: What do these populations look like? Do their credit characteristics indicate “Mortgage Readiness”? Is there enough affordable housing available in markets where they live?
4. In order to answer the questions I just asked, we obtained a unique data set combining Experian Consumer Credit information with Experian Marketing data. Note: underestimated thin file consumers during random sample/draw. Those without a credit profile were excluded since we sourced the sample from credit. Sample obtained from December 2015 VantageScore – consumer risk score that predicts: Probability of default within 24 months Likelihood of future serious DQ’s 90 days or greater In the familiar score range of 300–850 Higher scores represent a lower likelihood of risk Lower scores are higher risk Premier Attributes – aggregated level attributes on various types of debt; auto, mortgage, student loan, etc Income – estimated income and DTI models
5. Cindy - In order to determine those in our samples who we thought were “credit ready”. We sorted our sample into 3 credit categories based on some initial Underwriting Criteria. The main criteria was the Vantage score and the ability to have a DTI of < 45%. While CFPB has the ability to repay rule or QM (Qualified Mortgage) at 43%, the GSEs have some leeway so we gave a little buffer. A strong credit is > 737 and a moderate credit is between 661 and 736. Both are prime with 661 being the prime cut-off. Then we implemented some basic credit rules to further determine their credit strength such as foreclosures, bankruptcies and delinquencies. If they triggered any of these credit impairments, they moved from strong or moderate credit to weak. The weak credit also include those with <661 VantageScore. ( note but don’t say: <664 (661) = around a 680 FICO )
6. Cindy: Our sample contained around 11.6 million consumers, with an average 683 VantageScore You can see the mortgage characteristics of the population using the criteria we outlined earlier with 34% being mortgage ready, 32% weak and 4% unscoreable of those in the sample w/o a mortgage tradeline.
7. How generations have been characterized for purposes of this presentation
8. Scores represent consumers with and without a mortgage Mill – Near Prime Gen X – Prime BB – Prime Silent - Prime Millennial – less credit history, still in college, student loan debt, near Prime Gen X – more established credit profile, Prime, some younger Gen X’ers may still be paying off student loan debt Baby Boomers – established credit profile, Prime Silent – very established credit history, Prime, understand how to use credot
9. Stress – sample data Of those with student loans, it represents 64% of their total debt Average homeowner has a revolving card balance of $10k
10. Cindy: So, how many Millennials are mortgage ready given our criteria? We show 33% have strong or moderate credit or around 20.7 million. What really stands out is that 50% have weak credit. This is a huge percent but its not necessarily as bad as it may seem. First 40% of the weak are age 18-25 and haven’t had enough time to build up their credit Second, of those 51% with weak credit, 31% are what we call “near-moderate” meaning their Vantage score is 601-660. This subset could qualify for a mortgage but we would need to do additional research and for now we decided to be more conservative and put them in the weak segment. Note: Percentages include VS3 scoreable only
11. Cindy: Next we looked at education and income level by credit buckets For the stacked bar chart on the left, the way to read this is that each color represents a level of education and the lowest is at the bottom and the highest is at the top. For example, the yellow is the percentage of those in the population with less than a high school diploma. The teal is high school and red is some college (including trade school or current student). If you look at the weak category on the left, you see around 82% have Some college, high school or less in education. Looking at education level and credit buckets, there does seem to be a gradually increased in education with better credit but its not as pronounced as you might think. For example, graduate and undergrad are 18% in the weak category vs. 37% in have a mortgage. For Income, the results are what you would expect. The more income the better the credit. It is striking how much lower the average weak income is to the average Millennial income of 53,600. They have significantly less disposable income.
12. Cindy: Millennials and their student debt burden has been talked about a lot lately so we looked into how much of a burden it actually is. Student debt effects 33% of Millennials. Of those with debt, 15% percent of them have > 50K in student loans (These may have changed…check with Alex) 58% have < 20K in student loans which is less than the cost of most cars. When you look at the credit categories and amount of student debt each has, the noticeable thing is its not that compelling. What I mean is the various buckets of debt are about the same for each credit bucket and those with a mortgage. When you look at monthly loan payment you also see that the variance is not that big. However it is interesting that weak and moderate income have less payments than strong and have a mortgage. This could mean weak and moderate go more to less costly loans higher education institutions or possibly more trade schools vs. college. They also don’t make as much money given their higher % of gross monthly income going to student loan debt. This leads us to consider that Student loans influence the credit categories but don’t appear given our data snap shot to be that significant. However, more research is needed to determine the magnitude of student loan significance to credit strength. *(Open student loan trade on file)
13. Renae: Not surprising, Millennials appear to live in more urban areas. Some interesting or unexpected pockets: lower Idaho, Upper Nevada Utah pocket as well as some in North and South Dakota.
14. Tend to live in major metropolitan areas where there are jobs and housing These are the places where they can make $ Greater Los Angeles San Fran Chicago Dallas Houston EAST – NY, Boston, Baltimore, DC
15. Cindy: Once we determined where the top MSA where most of the Millennials live, we looked at which of those MSA are affordable. We defined affordable as if the “Weak or Moderate” consumers quarterly gross income > or = to the mortgage amount they would pay for in a year. These calculations are based on the assumption that they would put 10% down, 4% interest rate and get a 30 year mortgage. In addition, the average house price for SF and Condo median house price is at the county level using Freddie’s House Value Estimator as of December 2015. The percentage is how many mortgage ready millennials could afford that area. Given this criteria, the west coast does not seem to be affordable while you see Texas and Chicago appears to be the most affordable and the East coast is moderately affordable, especially for Condos.
16. Cindy: Next, we looked at which of these MSA had enough housing stock for the mortgage ready Millennials? We used RedFin to calculate an industry rule of thumb to see if housing it tight. If inventory/sales >6, we determined the greater MSA area had adequate housing supply, if inventory/sales < 6, we assigned the great MSA area as not having enough affordable housing. Keep in mind we used the snap shot period of December 2015 and the housing stock availability could change if we updated it for today’s date. Given these parameters, we estimated the greater New York MSA, Miami, and Houston areas where the top three areas where Credit Ready Millennials live, its an affordable area AND has enough housing stock. One of the business reasons Freddie Mac wanted to do this research is to see where they should focus efforts on expanding home ownership for these two growing segments. If you see the “stars” on the map, they are locations that Freddie Mac has a Borrower help center. These centers originally focused on hardest hit areas and have pivoted to not only doing borrower counseling but also helping the borrower though the shopping process. Freddie wanted to see if where we had these BHC were good locations for these two populations or if we should add a borrower help center in a new location or strategically place another type of resource center like a BHC in other locations. This research will help us better understand where we should provide sourcing and educations support for borrowers.
17. Cindy: After determining where good sourcing opportunities were for these populations, we wanted to better understand what factors (positively) and (negatively) played a role in them getting a mortgage. Holding everything else constant we found these factors significant and insignificant. Some unexpected results are that # of children, education, housing stock and the state effect or local economic factors where not that significant. Not so surprising is that age, marital status debt and income were significant factors. Not all of these variables have the same magnitude of significance. Let’s look at some in more detail.
18. Cindy: The two factors that have a strong correlation on homeownership is income and being married. While significant, the correlation is not as strong for student debt and home price. With on a 10% increase neither increases the likelihood of getting a mortgage more than 5%.
19. Cindy: In conclusion, Given the snap-shot of data at the end of December, we found that the Greater NY, Houston and Miami would be good areas for sourcing Millennials and Hispanics who are mortgage ready. We also found some homeownership challenges such as lack of affordable housing and high cost areas. While we saw lack of affordable stock in December, these areas can and should be monitored to see if opportunities are increasing. Lastly, we saw that many Millennials are credit constraint. To reduce this access to credit problem, Freddie has borrower help centers and Experian has a credit Educator.
20. Cindy: As mentioned earlier, Freddie Mac has various BHC that provide counseling and credit education. Some of the weak credit Millennials and Hispanics may not know how to use credit as a tool and it lowered their credit scored. Improving their credit education may improve it. Renae: Credit Educator Positively shapes consumer credit Thank audience Who has the first question? Who has the last question?