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» FBR Capital Markets' analysts believe a number of recent regulatory announcements, such as new representation and warranty guidance from the GSEs and the final definition of a Qualified Mortgage (QM), are important steps for bringing additional certainty to lenders, allowing them to expand credit availability. As part of that QM definition, the CFPB has incorporated an "Ability to Pay" rule, requiring mortgage lenders to verify a borrower has "stable income" and solid "probability of future employment." This pre-loan check is expected to have a significant effect on default 2012 Maximum Loan–to–Value (LTV) 100% 80% Maximum Combined LTV 125% 80% Maximum Loan Amount $2 million $1 million Debt – to –Income Ratio (DTI) 38/45 33/38 Minimum FICO Score 620 680-720 Bonus/Commission Income Allowed Not Allowed Primary Residence Allowed Allowed Second Home Allowed Allowed Investment Property Allowed Not Allowed Cash-Out Refinance Up to 100% LTV Up to 70% LTV Borrower without FICO Score Allowed Not Allowed IRS Form 4506 Optional Required Required Reserves 2 Months 6-12 Months Gift as Source of Funds Allowed Not Allowed Paystub Most recent Most recent 30 days W2's 1 year 2 years Verification of Employment Within 30 days of closing Within 10 days of closing Escrow (tax and insurance) Not required Required Chapter 7 Bankruptcy Discharged in last 7 yrs Discharged in last 7 yrs Chapter 13 Bankruptcy Discharged in last 7 yrs Discharged in last 7 yrs Foreclosure None in last 7 years None in last 7 years** Short Sale None in last 7 years None in last 7 years** Deed–in–Lieu None in last 7 years None in last 7 years** Judgments Must be Paid in Full Must be Paid in Full Charge–offs Must be Paid in Full Must be Paid in Full POINT— COUNTERPOINT * Requirements for obtaining a nonconforming prime mortgage ** If there are extenuating circumstances such as the death of a primary wage earner, a natural disaster, or an extended medical illness, this time could be shortened to as low as 2 years with re-established credit. THE BIG PICTURE UNDERWRITING GUIDELINES* 2007 INDUSTRY INSIGHT Sixteen percent of homeowners say they own a home because it is a good investment or it appreciates in value, according to Gallup's annual Economy and Finance survey conducted last month. Gallup says homeowners are most likely to identify financial reasons as the primary motive for their decision to buy, but many also mention the non-financial advantages of owning a home, such as freedom, pride, and comfort. Underscoring this idea, Gallup notes that barely a quarter of American homeowners indicate they bought a house because of the opportunity to realize financial gains. Home purchases by owner-occupants totaled 3.27 million last year, up 17.4 percent from 2.79 million in 2011, according to an annual survey by the National Association of Realtors (NAR). At the same time, investors bought 1.21 million single-family properties in 2012, down 2.1 percent from the record 1.23 million investor purchases in 2011. NAR says homes sold to investors remained well below the 1 million mark throughout the housing downturn. NAR's chief economist Lawrence Yun says while investors have been very active in the market over the past two years—attracted mostly by discounted foreclosures that could quickly be rented out—rising prices and limited inventory are likely to cause them to take a step back. Investors' interest in lower-priced affordable housing is one of the biggest obstacles to homeownership for a burgeoning population of Hispanic borrowers, according to the National Association of Hispanic Real Estate Professionals (NAHREP). The trade group believes communities are best-served when single-family residences, especially REOs, are sold to owner-occupants—a policy NAHREP Early Vetting Practices risk. The CFPB says it will prevent a repeat of the latest crisis. According to DBRS, one metric that can play a significant role in whether consumers repay their debt or default is leverage. The more highly levered a household, the less its ability to absorb economic shocks, the rating agency notes. Using the Federal Reserve's Financial Obligation Ratio (FOR) data to measure household debt payments to consumers' disposable income, DBRS determined that renter households have historically had a higher FOR than those who owned their home. This may be attributable to a variety of factors including a lower income relative to the cost of goods and to rental rates relative to the cost of a mortgage, DBRS explained. Importantly, the data show that household leverage for both consumer groups—renters and homeowners—has decreased from pre-recession levels. DBRS says this overall trend to lower leverage is influenced heavily by the low interest rate environment but could possibly signal a shift in consumer behavior. MARKET PULSE Asset or Home? says would help provide Hispanics and other minorities with an equal opportunity to become American homeowners. NAHREP reports that from 2000 to 2012, the number of Hispanic homeowners grew from 4.24 million to 6.69 million—a 58 percent increase compared to a net increase of only 5 percent for the rest of the U.S. population. COVER STORY According to Wells Fargo Securities' economic team, average FICO scores for new mortgages have increased approximately 30 points since 2007, evidence that prospective homebuyers continue to face difficulty securing a home loan at a time when housing affordability is at an all-time high. Mortgage demand is likely to strengthen upon greater household formation. Based on data from the U.S. Census Bureau, there were 1.3 million new households formed in 2010. In 2011, formations rose to 1.7 million. The tally for 2012 is expected to reveal a slight decline with the annualized rate in December at 973,000. Still, by comparison, approximately 550,000 net households formed each year between 2006 and 2011, which were greatly impacted by the recession. Over the previous five-year period, household formation averaged 1.35 million per year. VISIT US ONLINE @ DSNEWS.COM Source: DBRS 51

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