For home­buy­ers, mort­gages safer but tougher to come by

Daily Freeman (Kingston, NY) - - BUSINESS - By Alex Veiga

Keri Weishaar lives in a spa­cious, four-bed­room house near Tampa, Florida, thanks to the easy fi­nanc­ing that pre­vailed dur­ing last decade’s hous­ing boom.

“It was ba­si­cally noth­ing to get into this house,” said Weishaar, 48, who bought the house in the spring of 2003 af­ter ob­tain­ing a nomoney down, ad­justabler­ate mort­gage.

Then again, Weishaar and her hus­band are for­tu­nate to still have their home. That same mort­gage even­tu­ally mor­phed into a fi­nan­cial al­ba­tross and, for a time, the house in the sub­urb of Tar­pon Springs was on a count­down to fore­clo­sure.

As home val­ues plum­meted af­ter the hous­ing bub­ble burst in 2007, many bor­row­ers with ex­otic types of loans were stuck, un­able to re­fi­nance as lenders be­gan to tighten their lend­ing cri­te­ria. That set the stage for cas­cad­ing mort­gage de­faults that even­tu­ally took down Lehman Brothers, Wall Street’s fourth-big­gest in­vest­ment bank at the time, 10 years ago this week. Lehman and other fi­nan­cial in­sti­tu­tions were big buy­ers of se­cu­ri­ties backed by some of these dicey mort­gages.

To­day, get­ting a mort­gage is tougher — and less risky. For one thing, no-money down mort­gages and their ilk, which en­abled many bor­row­ers to ini­tially lower the costs of buy­ing a home but of­ten saddled bor­row­ers with far higher bal­ances or steep monthly pay­ment in­creases, have van­ished.

Banks also re­main a bit gun-shy af­ter rack­ing up bil­lions in losses stem­ming from mort­gages gone bad. That means home­buy­ers, es­pe­cially those with lessthan-stel­lar credit, face more hur­dles qual­i­fy­ing for a mort­gage than they did in the hous­ing boom years. But the loans are safer, more trans­par­ent and ac­tu­ally take into ac­count whether a bor­rower can af­ford to keep up with pay­ments.

“The banks have cer­tainly loos­ened un­der­writ­ing cri­te­ria for low-risk bor­row­ers; they haven’t loos­ened un­der­writ­ing cri­te­ria for low-credit score bor­row­ers,” said Aaron Ter­razas, se­nior econ­o­mist at Zil­low. “The types of lend­ing that we saw lead­ing up to that crash in 2008, for the most part, we’re not see­ing nowa­days.”

When in­ter­est rates be­gan to plum­met at the start of the 2000s, lenders rushed in to make non­tra­di­tional loans that could be sold for hefty prof­its to Wall Street banks, as well as govern­ment-spon­sored mort­gage buy­ers Fred­die Mac and Fan­nie Mae.

These riski­est of these loans re­quired lit­tle proof that the bor­rower could af­ford to pay them back and an ini­tial pe­riod of low pay­ments and in­ter­est rates. Some let bor­row­ers de­fer in­ter­est pay­ments. Ul­ti­mately, these loans over­whelmed many bor­row­ers’ abil­ity to keep up with pay­ments.

That’s what hap­pened with Weishaar’s mort­gage. The loan was sched­uled to ad­just to a higher rate af­ter three years, but she was able to re­fi­nance it with an­other ad­justable-rate mort­gage. The next time it re­set, how­ever, was late 2007, as the hous­ing down­turn ac­cel­er­ated. Her hus­band had lost his job and she was mak­ing less money. The cou­ple’s loan jumped from a 6.2 per­cent in­ter­est rate to 11 per­cent, jack­ing up the monthly pay­ment from $2,101 to $3,417.

The easy fi­nanc­ing, which had en­abled the cou­ple to buy their $346,800 house, back­fired.

“We bought prob­a­bly about $120,000 more home than we should have,” Weishaar said.

Af­ter miss­ing a few pay­ments, the lender agreed to mod­ify the loan. The in­ter­est rate dropped to 6.2 per­cent and the cou­ple’s missed pay­ments and fees were tacked onto their un­paid prin­ci­pal.

The Weishaars rode out the tur­bu­lent econ­omy and hous­ing mar­ket in the years af­ter the fi­nan­cial cri­sis and were able to re­fi­nance again in late 2014 into a 3.5 per­cent, 20-year fixed-rate loan. Now their pay­ment is around $1,500, with­out taxes and in­sur­ance.

“I only have 15 years left on my house now and I’m in a good place,” said Weishaar, now di­rec­tor of sales for an IT con­sult­ing com­pany. “The next house I buy will be paid for in cash.”

The pri­vate mar­ket for mort­gage-backed se­cu­ri­ties, which helped fuel so much easy lend­ing dur­ing the hous­ing boom, is now a sliver of what it was back then.

Mort­gage-backed se­cu­ri­ties is­sued by pri­vate firms now rep­re­sent about 4.5 per­cent of the mar­ket, ac­cord­ing to data from In­side Mort­gage Fi­nance and the Ur­ban In­sti­tute. In 2006, the peak of the hous­ing boom, it was nearly 60 per­cent.

Govern­ment-spon­sored en­ter­prises such as Fan­nie Mae and Fred­die Mac now ac­count for about 95.5 per­cent of the mar­ket.

Leg­is­la­tion aimed at avert­ing an­other fi­nan­cial cri­sis set out cer­tain guide­lines that lenders must fol­low if they want to make their home loans el­i­gi­ble to be guar­an­teed by the govern­ment. The big­gest change is a rule re­quir­ing lenders to es­tab­lish the bor­rower’s abil­ity to re­pay the loan.

In the case of a five-year ad­justable-rate mort­gage, that means en­sur­ing the bor­rower can af­ford to pay the loan should it re­set to a higher in­ter­est rate.

The law, known as Dod­dFrank, also nixed the types of risky loans of­fered dur­ing the hous­ing bub­ble, among other changes.

“For the av­er­age con­sumer, the big­gest thing that has changed is it’s a lot clearer at the clos­ing ta­ble what kind of loan you’re get­ting and what you can ex­pect to pay over the life of the loan, and that’s a very good thing,” said Jesse Van Tol, CEO of the National Com­mu­nity Rein­vest­ment Coali­tion, which ad­vo­cates for fair­ness in hous­ing, bank­ing and busi­ness.

The guide­lines may of­fer lenders a clear path on how to gauge qual­i­fied buy­ers, but in many cases banks have over­laid stricter qual­i­fy­ing re­quire­ments, like higher credit scores.

That’s one rea­son the av­er­age FICO score on home pur­chase loans has drifted about 21 points higher over the past decade, ac­cord­ing to data from the Ur­ban In­sti­tute. The trend is more pro­nounced in met­ro­pol­i­tan ar­eas with high home prices. Con­sider that in San Fran­cisco, the av­er­age FICO score for bor­row­ers is around 774. In the River­side-San Bernardino met­ro­pol­i­tan area east of Los An­ge­les, FICOs av­er­age 717.

The av­er­age FICO score in Amer­ica was 700 last year. A score of 740-799 is con­sid­ered “very good.”

“The pen­du­lum has swung too far in the other di­rec­tion,” Van Tol said. “When you look at a Fan­nie Mae or Fred­die Macbacked loan with an av­er­age credit score in the high 700s, home­own­er­ship at a 50-year low, and a lot of peo­ple boxed out of the mort­gage mar­ket, cer­tainly credit is too tight. Too few peo­ple have the op­por­tu­nity to be­come home­own­ers to­day.”

Buy­ers are see­ing some re­lief from non­bank lenders such as Quicken Loans, United Whole­sale Mort­gage and Car­ring­ton Mort­gage, which are grow­ing play­ers in the res­i­den­tial lend­ing mar­ket.

The share of loans is­sued by non­bank lenders and backed by the govern­ment has been climb­ing since 2013. The me­dian FICO scores for loans is­sued by non­bank lenders and sold to Fan­nie Mae and the other govern­ment mort­gage buy­ers are lower than those of loans from banks, ac­cord­ing to the Ur­ban In­sti­tute.

Un­like many home­buy­ers en­ticed by the frenzy of easy lend­ing dur­ing the hous­ing boom, Chris­tian Ray re­sisted push­ing the lim­its of what he could af­ford when he be­came a home­owner last month.

A lo­gis­tics man­ager for a bev­er­age com­pany, Ray bought a two-bed­room, twoand-a-half bath town­home in Tampa for $158,000, even though his lender qual­i­fied him for a $240,000 mort­gage.

“I’m not go­ing to be mar­ried to the house,” said Ray, 23. “I lit­er­ally would just come home, pay the bills and just stay here and barely feed my­self.”

Ray also opted for just about the most un­ex­otic, vanilla home loan around: A 30-year, fixed-rate mort­gage at 5 per­cent in­ter­est. And he put up a 10 per­cent down pay­ment.

“I’m not go­ing to take 30 years to pay it,” Ray said.

JOHN LOCHER — THE AS­SO­CI­ATED PRESS

The Las Ve­gas Strip is seen in the dis­tance from Uni­corn Hills Drive in the un­fin­ished Uni­corn Hills de­vel­op­ment in Hen­der­son, Nev. Banks re­main a bit gun-shy af­ter rack­ing up bil­lions in losses stem­ming from mort­gages gone bad.

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