5 QUESTIONS ON THE STATE OF MORTGAGE LENDING
Anyone who’s tried to get a mortgage in recent years knows that it hasn’t been easy. But there are growing signs that lenders are becoming less picky amid a rebound in home prices and a drop-off in mortgage refinancing. Here are five things to know:
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1IS LOW-DOWN-PAYMENT LENDING COMING BACK?
Yes. To be sure, it never really went away after the housing bust hit because the Federal Housing Administration, which requires just a 3.5% down payment, continued to do business after the housing bust deepened in 2008. The FHA doesn’t make loans but insures loans made by lenders that meet its standards.
Here’s what is changing: banks are making more loans with down payments of 5% or 10% outside of the FHA. The share of loans with down payments of less than 10% rose to a five year high last year, according to data from Black Knight Financial Services. This largely reflects the increased appetite from private mortgage insurers to insure loans.
Many of these loans are sold to Fannie Mae and Freddie Mac, which will accept down payments as low as 5% as long as the loans have private mortgage insurance. Because the FHA has sharply increased its fees over the past two years, doing a low-down-payment mortgage with private insurance is often a cheaper way to go for borrowers with good credit. Borrowers will still have to pay more than they would if they had a 20% down payment.
Down payment standards are also declining for “jumbo” loans that are too large for government backing. More banks will do jumbo loans with 15% or even 10% down payments, down from 20% a few years ago.
In addition to having great credit, borrowers need to be able to thoroughly document their incomes and the source of those down payment funds. Some loans—such as condominiums—can still be harder to do. If you’re running into hurdles, check out a smaller community lender and credit unions, which tend to keep these banks on their books and might have more flexibility.
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2WHAT ABOUT NO-MONEY-DOWN MORTGAGES?
These still exist, too, though they are much harder to get than before the housing bubble. Veterans can apply for 100% financing on loans insured by the Veterans Administration, and the U.S. Department of Agriculture has several loan programs that will provide no-money-down loans in certain rural areas. Navy Federal Credit Union, the nation’s largest credit union, offers no-money-down mortgages to qualified members, which are typically members of the military.
Another alternative: Find out if you can use a down-payment gift from a family member, employer, or state agency. Some states offer down-payment assistance through their housing-finance agencies, while some lenders will allow borrowers to use gifts from family members for a down payment. In most cases, these need to truly be gifts and not loans that must be repaid. TD Bank’s “Right Start” mortgage product allows borrowers to make 3% down payments, and the funds can be gifted from a relative, nonprofit group, or state agency.
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3DIDN’T LOW-DOWN-PAYMENT MORTGAGES CAUSE THE HOUSING BUBBLE?
It’s true that increasing leverage fueled the housing bubble during the past decade. But many of the biggest problems stemmed from either poorly designed products—adjustable-rate mortgages with teaser rates, for example, that reset to sharply higher payments—and loans that were given out to borrowers without verifying their incomes. Those products aren’t coming back right now.
New consumer protection regulations that took effect in January are likely to block or slow their reintroduction because they impose stiff potential penalties on lenders that don’t verify a borrower’s ability to repay a mortgage. “Reaching for clients is still inconceivable to most lenders,” said Lou Barnes, a mortgage banker in Boulder, Colo., who says credit standards over the last five years have been tighter than any in his 36-year career.
To the extent lenders ease standards, they’re also unlikely to do it by expanding product offerings, said Michael Fratantoni, chief economist of the Mortgage Bankers Association. J.P. Morgan Chase & Co, for example, said earlier this year it would offer just 15 different mortgage products or programs by the end of this year, down from 25 today and 37 one year ago. “We just want to make sure for the customer’s benefit…we offer simplified products that they clearly understand,” said Kevin Watters, chief executive of the bank’s mortgage unit.
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4IN WHAT WAYS ARE CREDIT STANDARDS STILL STRINGENT?
Borrowers with weak credit are largely on the outs. Some 28% of purchase loans last year went to borrowers with credit scores above 780, compared to less than 12% in 2001, before the housing bubble began inflating, according to a recent report from Goldman Sachs. Meanwhile, less than 0.2% of borrowers had credit scores below 620 last year, compared to more than 13% in 2001.
“One can fairly say that credit is relaxing. The question we’re still trying to sort out: ‘Is it still too tight?’” said Mark Fleming, chief economist at research firm CoreLogic Inc.
To the extent lending standards are tight, economists say it’s because lenders have instituted so-called “overlays” that restrict lending beyond the requirements of Fannie, Freddie or federal agencies in order to minimize the risk they’ll have to repurchase defaulted loans. Banks are also scrutinizing anything that could be used to justify a put-back, from appraisals to the sources of a borrower’s down payment to the borrower’s bank statement and incomes.
Some banks have begun to roll back some overlays. The share of FHA borrowers with credit scores below 650 rose to 20% at the end of last year, from less than 15% in August.
But it could remain harder sledding for borrowers who can’t easily document their incomes, including those who are self-employed or have uneven incomes. Borrowers that have gone through a bankruptcy have to wait as long as seven years to get a mortgage.
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5WHAT DOES THIS MEAN FOR THE U.S. ECONOMY?
Some economists—together with policymakers at the White House and the Federal Reserve—have raised concerns that the mortgage-credit pendulum, after swinging too far to one extreme during the bubble, has today gotten stuck too far in the other direction. The worry is that entry-level buyers and others that suffered job loss or an income shock during the recession could be shut out of the housing rebound.
All-cash buyers have accounted for roughly one third of sales of previously-owned homes in recent years. “Goodness sakes—it shouldn’t be that high,” said Matt Vernon, a top lending executive at Bank of America, at an industry conference last fall. The high share of cash buyers is a sign that “a lot of folks are avoiding the hassle of our industry,” he said.
Research by analysts at the Urban Institute, a think tank in Washington, found that if credit standards in 2012 had returned to pre-bubble levels, around 200,000 more mortgages would have been made that year.
A separate report from economists at Goldman Sachs estimated that new home sales should rise to 800,000 units in 2017, from 430,000 last year, based on traditional drivers such as job growth and household formation. But if lending standards remained at their current level, new home sales would rise to just 600,000 units.
– AnnaMaria Andriotis contributed to this post.
- http://blogs.wsj.com/briefly/2014/04/18/5-questions-on-the-state-of-mortgage-lending/
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