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Zillow's Mortgage Access Index to Assess Credit Worthiness

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Leading online real estate information provider, Zillow Inc. recently inaugurated the Zillow Mortgage Access Index (ZMAI) which shows that obtaining a mortgage today is considerably easier than it was a year ago. The index shows how easy or difficult it is to get a mortgage at a certain time relative to other points in time.

The index considers seven variables — credit scores, debt-to-income ratio, private mortgage insurance, second mortgages, non-conforming loans, the mortgage rate spread and Zillow Mortgage Quotes — to measure access to credit.

Under the Credit Score, the index tracks the lowest 10th percentile of borrower credit scores by using Fannie Mae Loan Acquisition data, through which it finds out the borrowers who were nearly denied in the period. Lower credit score approvals indicate recovering mortgage credit scenario.

Debt-to-Income Ratio signifies total monthly debt payments as a percent of gross monthly income. Under this, the index tracks 90th percentile of the borrowers’ monthly debt-to-income ratio by using Fannie Mae Loan Acquisition data. An increase in debt-to-income ratios indicates a better mortgage credit scenario.

The Private Mortgage Insurance measures the proportion of low down payment loans that are privately insured. The higher the privately insured mortgages are, the better the mortgage credit scenario is.

The Second Mortgage Prevalence mainly measures the percentage of home equity loans and lines of credit to all loans issued in a period. An increase in this variable indicates mortgage credit is loosening.

Loans which the two largest U.S. guarantors, purchasers and securitizers of loans -- Fannie Mae and Freddie Mac -- will not buy due to lower underwriting standards are called as Non-conforming Loans. Therefore, under this variable, the index measures how much risk lenders are willing to take to give credit to these borrowers. An increase in this variable would suggest recovering mortgage credit scenario.

The Mortgage Rate Spread is basically the spread between 30-year fixed mortgage rates and the 10-year Treasury rates. A narrowing spread indicates better mortgage credit scenario.

According to the company, the Zillow Mortgage Quotes variable “tracks the monthly average number of quotes given to borrowers with credit scores between 600-640 compared to the number given to borrowers with credit scores of 760 or higher. The closer the two numbers are, the easier mortgage credit is to obtain.”

Going forward, Zillow announced that ZMAI data will be released in January, April, July and October each year.

According to the ZMAI, it was easiest to obtain a mortgage in Aug 2004 and it became gradually difficult over the next few years. When the sub-prime crisis hit in 2007, securing a mortgage became more difficult with Sep 2010 being the tightest period.

However, according to the index the lenders have opened their doors in the past couple of years due to which many borrowers who were only eligible for FHA loans in the previous year due to their low credit score or down payments are now being offered conventional loans with private mortgage insurance. According to the ZMAI index “today, access to mortgage credit has improved significantly, and is roughly two thirds of the way back to 2002 pre-crisis levels.”

We believe that several factors are contributing to the resurgence in the U.S. housing market. In early January this year, President Obama announced that the FHA would reduce mortgage insurance premiums to 0.85%, a cut of 0.5 percentage points. This will be particularly beneficial for new homebuyers.

Overall, the move will benefit around 800,000 homeowners who will enjoy reductions on monthly mortgage costs. New borrowers will save $900 annually on an average.

Further, lower fuel prices will have a positive impact on the housing sector. We believe that lower fuel prices along with improving employment level have greatly increased the purchasing power of U.S. consumers. A reduction in fuel costs is increasing consumer confidence, which in turn will boost home building.

Above all, a lower mortgage rate, which is still hovering around 4%, is expected to further attract home buyers.

This year promises to be a good one for housing given a combination of structural causes. Additionally, lower fuel prices will make this space more attractive.

Zillow currently carries a Zacks Rank #3 (Hold). However, better-ranked stocks in the Internet Service space include Autohome Inc. (ATHM - Free Report) , LivePerson Inc. (LPSN - Free Report) and United Online Inc. . All the stocks sport a Zacks Rank #1 (Strong Buy).




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