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NASHVILLE HOUSING OUTLOOKCompany Overview

The Truth about Mortgage Underwriting

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Local insight was provided by Lance Ramella, Consulting.

For further information, on our research please contact Lance at lramella@realestateconsulting.com.

Nashville Analysis*

• Excellent fundamentals make Nashville Warm. Resale sales in Nashville are up 17% from twelve months ago, and our Burns Home Value IndexTM indicates that home prices have increased nearly 8% over the same period. Listings are up 5% compared to last year, with 19.4K properties on the market; this is the highest level in over two years. Pre-foreclosures, a leading indicator of future home sales that will be distressed sales, are below 2007 lows, which suggests a healthy market. Resale inventory is down 9% YOY at 7.5 months; for comparison, 6 to 7 months is generally considered equilibrium.

• New home market is strong. Our Midwest consultant, Lance Ramella, notes that Nashville is a competitive and strong market. In the most desirable submarket, Brentwood, builders we spoke with are selling between 2 and 3 sales per month at $500K to $700K. Franklin sales are comparable but tend to have a lower price point than Brentwood. In Wilson County, well-located communities are selling 3 to 4 sales per month priced between $250K and $350K.

• Excellent job market. 26.2K jobs were added in Nashville over the past twelve months, up 3.2% compared to last year. 12.6K of the new job additions stemmed from high-income sectors, which bodes well for the local economy and housing demand. A study by Forbes named Nashville as the 4th big city in the nation that is “stealing financial jobs from Wall Street.” Financial sector jobs in this market are up 13% from 2008. The unemployment rate is down to 5.1% from 6.6% last year, well below the national unemployment rate of 6.1%. Verizon Wireless is adding more than 300 new jobs to Nashville, while UBS has announced they will create 1,000 new jobs over the next five years.

Analysis

Lance RamellaSr. Vice PresidentConsulting

• Permit activity is on the rise. 7.5K single-family permits were issued over the past twelve months, an increase of 18%. Multifamily permits almost doubled over the same period, with 4.8K issued. East Greenway Park, a 62-unit single-family infill project in East Nashville, is set to start in fall. The cottages are expected to sell from $225,000 to $375,000 or more. The employment-to-permit ratio of 2.1 suggests that the demand for new housing in Nashville is far outpacing the supply. (1.2 is considered equilibrium.)

• Strong 55+ and investor demand. Nashville is very attractive to the 55+ crowd that is interested in age-restricted communities. Goodall Homes has been adding new communities to cater to this demographic, including the Cottages of Bent Creek in Nolensville, Water’s Edge in Franklin, and Lenox Place in Gallatin. In addition to retirees, investor activity in this market is elevated, with nearly 22% of all sales attributed to investors.

*Based on July 2014 Data

Nashville, TN

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Housing Cycle Risk Index

Market TrendsMetro Analysis and Forecast*

HCRI Legend

Our HCRI is a 1–2 year leading indicator for home price appreciation/depreciation. Improving markets (rising prices and rising construction) make the market riskier and vice versa.

*Based on a three-month trend

Demand

Actual results will vary from projections and the variation can be significant. We assume no liability for the use of any of the data or projections in this report. Projections as of: July 2014

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John Burns Real Estate Consulting (JBREC) is a national independent research provider and consulting firm focused on the U.S. housing industry. Our goal is to provide strategic guidance that drives profitability. Our passionate team of 50+ analysts and consultants help our clients identify areas of opportunity and risk through timely and trusted analysis. We are able to do this because of our:

About Us

• Client focus. Our clients have personal access to our team of market and industry experts. We also connect clients to opportunities for new business. We seek to continually innovate and improve our practices to make our clients’ lives easier.

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“My experience with John Burns has enabled me to better assess current market risk level at any point in the homebuilding cycle. Also, I have been able to make new valuable contacts.”

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Home Builder, President

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the rich. While the Dodd-Frank rules were written with good intent, let the truth be known, so more first-time buyers can take advantage of current programs to buy homes. Let the bankers use good judgment again, so more affluent buyers can get a mortgage.

EASY MONEY THROUGH FHA

FHA federally insures 95%+ loan-to-value (LTV) mortgage loans made to people with poor credit and low incomes.

Here are three recently approved loans, all through FHA or VA:

1. Recent foreclosure. 96.5% loan on a $170,000 house to a couple with $36,000 in income, a foreclosure three years ago contributing to their 620 FICO score, and debt service equal to 55% of their gross income

2. 57% of income needed to pay debts. 96.5% loan on a $165,000 home to a couple with $38,000 in income, a 642 FICO score, and debt service equal to 57% of their gross income

3. Fixed income and disabled. 100% loan on a $160,000 home to someone permanently disabled with a 601 FICO score and a $34,000 fixed income

TIGHT MONEY ABOVE FHA LIMITS

Affluent commissioned salespeople, self-employed, newly employed, and retirees who don’t have steady paychecks have tremendous difficulty getting a mortgage because they either:

The world is awash in inaccurate sound bites related to mortgage credit. We spoke with numerous industry executives and identified three truths that need to be clarified:

1. Low income buyers actually have it easy. Buyers with poor credit and low income are finding it quite easy to buy a home below the FHA limit.

2. Many affluent buyers find it very difficult. Automated underwriting prevents many highly qualified borrowers, especially affluent retirees, self-employed, or commissioned salespeople from getting a mortgage because their income situation does not fit squarely in the credit box.

3. Industry executives are unintentionally preventing a recovery. Mortgage industry executives lobbying for the good old days where FHA limits were higher, fees were lower, and documentation was easier need to stop whining because they look very unreasonable to regulators and politicians who are not sympathetic.

Our purpose here is to shed some light on what is actually happening—because if there were clarity around this, we would have:

1. More entry-level home buyers. Many qualified people are not even shopping for a home because they presume they cannot get a mortgage. We provide several examples of easy qualification below.

2. More affluent home buyers. More good loans to very qualified buyers would be made if underwriters were allowed to use good business sense rather than fill in automated forms. As we did our research, we heard many stories of buyers reluctantly paying cash or deciding not to move at all and telling their friends who then also elect not to move. These include business owners, retirees, and commissioned salespeople.

3. More relocating home buyers. Many relocating employees are renting simply because they cannot provide historical pay stubs at their new employer. Given their track record of steady employment and desirability to multiple employers, does that make any sense?

In the aftermath of the housing crisis, the reality is that we are lending aggressively to the poor and conservatively to

The Truth about Mortgage Underwritingby Lisa Marquis Jackson, SVP

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• report inconsistent income to the IRS,

• cannot provide extended income history from a new employer, or

• do not have sufficient current income to qualify but are trying to keep some cash in the bank or delay paying taxes on an IRA distribution.

Here are six borrowers who were denied a mortgage:

1. 27% LTV. A couple with a 780 FICO score who wanted a $300K loan on a $1.1 million house and would have $300K in reserves after closing, but whose verifiable income was only 30% above the proposed mortgage payment.

2. 801 credit score. Newly retired couple with fantastic 801 credit score, $1 million in retirement accounts, and $400,000 in savings after they were going to put down $350,000 on a $550,000 home purchase, but whose Social Security income was less than double the proposed mortgage payment.

3. Affluent business owner. Owners of a small retail business who were turning the business over to their children to manage, with the intent of collecting dividend income; who had $500K in cash savings and wanted a 50% LTV.

4. Relocating borrower. A US citizen who has been working overseas takes a job in the US, has a 700 FICO, 20% down payment, and plenty of reserves, but cannot produce a W-2 because he does not exist in the country in which he was working and hasn’t started his new job yet.

5. New employee. A prospective borrower qualified in every way except she had only been in her current job for five months and had worked in the family business previously where she did not get a W-2.

6. Loan = 15% of applicant’s assets. A retiree who wanted a 50% LTV and had assets six times the proposed loan amount was turned down and eventually paid cash.

MORTGAGE INDUSTRY VETS TELL IT LIKE IT IS

We expect the borrowers and outcomes profiled above will be surprising to many. We also want to share the following sound bites from mortgage industry veterans to offer surprising clarity on other areas of debate:

• Loans today are easier than the 1990s. “For the average borrower, I believe it was more difficult to qualify for a mortgage in the 1990s.”

• Huge improvements are being made in conforming loans. “For a while, if you didn’t have a credit score over 720 and you wanted a loan with less than 20%

down, you were pretty much looking at an FHA loan. During this period, it’s fair to say that sales were being seriously impacted by 20%+. Slowly at first, and now more rapidly, things are changing. Credit requirements for 95% conventional financing are as low as 620, and MI companies have lowered premiums and relaxed guidelines. Banks have been peeling back overlays. You aren’t likely to get a conventional loan with a ratio above 45% anymore, but nor could you really get that back in the 90s either.”

• Disposable income is more important than gross income. “Our industry needs to focus more on disposable income versus debt-to-income ratios, meaning a borrower who makes $2,200 a month with a 40% debt-to-income ratio is more risky than someone who makes $12,000 a month with a 50% debt to income ratio. The first borrower has very little cushion after income taxes, utilities, car insurance, food, etc. for emergencies. But the person making $12,000 a month would have much more left over after all of these other debts.”

• Stated income should have its place. “There is a time and a place for Stated Income, not “No Doc” loans, but Stated Income loans. They were a great tool back in the 2000s that rarely went bad if they were used properly because the borrower had a lot of their own capital invested in the home.”

• Income is the problem. “The challenge is not credit based, it’s income based. Home valuations have increased at a steeper trajectory than income. Also, the new buyer pool is saddled with student loans and other debt, which has really created the (disposable) income issue. I believe credit is much more accessible than the media/public portrays (in terms of credit scores, LTV’s, etc.) My opinion will remain our immediate challenge is income/debt/DTI.”

SUMMARY

In conclusion, let’s:

• Get the word out that loans below the FHA limit are readily accessible, with monthly payments that are a great historical value in comparison to gross incomes.

• Let the bankers use manual underwriting in instances where they can document that the loan has a very low likelihood of losses.

Lisa Marquis Jackson, SVP(214) 389-9003

lmjackson@realestateconsulting.com

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Lance consults on a broad spectrum of residential and commercial properties, including all for-sale and rental product types, master-planned communities and resorts, infill developments, and active adult and senior housing projects. With over 26 years of industry experience, he has led consulting operations and management for the Central and Eastern US as Director of Consulting at Metrostudy and Senior Managing Director at Hanley Wood Market Intelligence.

As a leader in the industry, Lance regularly provides insight to leading publications including The Chicago Tribune, Crain’s Chicago Business, The Daily Herald, Builder Magazine, Big Builder Magazine, Developer Magazine, and The Washington Post. He has been a featured speaker at the Builder 100 Conference, Developer Conference, Presidential Seminar Urban Land Institute and Navigating the Chicago Real Estate Market.

In his free time, Lance enjoys golf, reading and riding his bike.

EducationB.S. from Arizona State University’s W.P. Carey School of Business

AffiliationsULI Chicago ChapterULI – Community Development Council – Blue Flight HBA of Greater Chicago

LANCE RAMELLASr. Vice President

(630) 544-7826 lramella@realestateconsulting.com

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As Senior Vice President, Lisa leads the company’s strategic research and business development efforts. With over 23 years of experience in housing research, she is a proven industry strategist with a demonstrated track record for driving growth and successfully creating solutions for complex business challenges and opportunities. Leveraging the strength of her network, experience and industry knowledge, Lisa is a driver of opportunity and has developed a reputation for being a dynamic and strategic business advisor.

Prior to joining John Burns Real Estate Consulting, Lisa was an award-winning business journalist providing in-depth news and interpretive coverage of the housing industry for 18 years—most recently with Hanley Wood publications. She also gained industry experience as an account director for a boutique marketing research firm, creating custom research products for business-to-business clients.

Lisa has been widely sourced in major media including the  Wall Street Journal, NPR, and CNBC.

In her free time, Lisa enjoys tending to her budding, urban farm.

EducationB.S. in Mass Communications from Illinois State University

LISA MARQUIS JACKSONSr. Vice President

(214) 389-9003 lmjackson@realestateconsulting.com

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