Home lend­ing rules loosen

With hous­ing prices so high, lenders move to make it eas­ier to buy.

Los Angeles Times - - FRONT PAGE - By An­drew Khouri

Home prices are ris­ing across the coun­try, and mort­gage rates, though still his­tor­i­cally low, are up since the pres­i­den­tial elec­tion.

Sim­ply put, buy­ing a home isn’t easy, es­pe­cially in high-cost metropoli­tan ar­eas such as Los An­ge­les County, where the me­dian price of a home hit $569,000 in June.

But changes in the mort­gage in­dus­try are afoot, with the goal of loos­en­ing some of the strict stan­dards es­tab­lished af­ter the sub­prime cri­sis — rules that some blame for im­ped­ing sales.

“The re­al­ity has sunk in that there are buy­ers out there who will be able to buy homes and make the mort­gage pay­ments,” said Wil­liam E. Brown, pres­i­dent of the Na­tional Assn. of Realtors. The in­dus­try is “try­ing to give them more op­tions to buy a house.”

Gov­ern­ment-con­trolled mort­gage giants Fan­nie Mae and Fred­die Mac are pav­ing the way by rolling out new pro­grams to en­cour­age home own­er­ship.

The com­pa­nies, with their con­gres­sional man­date to pro­mote home own­er­ship, don’t orig­i­nate loans but pur­chase mort­gages from lenders to keep the mar­ket mov­ing. And any changes they make in the un­der­writ­ing stan­dards for the loans they buy can have a big ef­fect.

Also, lenders are mov­ing to re­lax

some stan­dards partly be­cause they fear los­ing busi­ness as home prices and mort­gage rates rise, said Guy Ce­cala, pub­lisher of In­side Mort­gage Fi­nance.

“If your busi­ness is going to drop 20%,” he said, “you need to come up with ways to off­set that.”

The changes bring lend­ing nowhere near the easy­money bo­nanza of last decade, which ended in fi­nan­cial cri­sis. But they have brought crit­i­cism from some cor­ners that lib­er­al­iz­ing rules for down pay­ments and how much debt a bor­rower can have is a slip­pery slope that could even­tu­ally lead to an­other bub­ble.

“This is what hap­pened last time,” said Ed­ward Pinto, a fel­low at the Amer­i­can En­ter­prise In­sti­tute, a con­ser­va­tive think tank.

Low down pay­ments

Dur­ing the bub­ble, bor­row­ers of­ten could put down noth­ing at all by fi­nanc­ing the en­tire pur­chase.

Af­ter the crash, stan­dards tight­ened con­sid­er­ably and fed­eral reg­u­la­tors even floated a pro­posal to re­quire 20% down for many mort­gages, which would amount to $113,800 in order to buy a me­dian-priced home in Los An­ge­les County as of June.

For a low-down-pay­ment op­tion, bor­row­ers usu­ally had to turn to the Fed­eral Hous­ing Ad­min­is­tra­tion, which al­lows 3.5% down but re­quires costly mort­gage in­sur­ance.

Now, bor­row­ers in­creas­ingly have more op­tions, though gen­er­ally they need a good credit score.

The trend started in late 2014 when Fan­nie Mae and Fred­die Mac an­nounced new pro­grams that al­lowed loans with as lit­tle as 3% down. But many large banks still reel­ing from the hous­ing bust that cost them bil­lions were skep­ti­cal. Bank of Amer­ica Chief Ex­ec­u­tive Brian Moyni­han said his com­pany was un­likely to par­tic­i­pate.

“I don’t think there’s a big in­cen­tive for us to start to try to cre­ate more mort­gage avail­abil­ity where the cus­tomers are sus­cep­ti­ble to de­fault,” he told a con­fer­ence in 2014.

But less than two years later, the bank started of­fer­ing 3%-down loans through a part­ner­ship with Fred­die Mac. Wells Fargo, the na­tion’s largest mort­gage lender, also jumped in last year, part­ner­ing with Fan­nie Mae. JPMor­gan Chase now of­fers 3%-down loans as well.

“We are see­ing more and more lenders adopt­ing it ev­ery day,” said Danny Gard­ner, Fred­die Mac’s vice pres­i­dent of af­ford­able lend­ing and ac­cess to credit.

The 3%-down loans through Fan­nie or Fred­die are capped at $424,100 in most of the coun­try, in­clud­ing Cal­i­for­nia.

Bank of Amer­ica launched its pro­gram with Fred­die Mac af­ter part­ner­ing with a non­profit to pro­vide fi­nan­cial coun­sel­ing for the life of the loan, a spokesman said. Af­ter six months, BofA upped its an­nual orig­i­na­tion cap from $500 mil­lion to $1 bil­lion for the Af­ford­able Loan So­lu­tion Pro­gram, which al­lows down pay­ments as low as 3%.

Some are going even lower.

This year, Fan­nie Mae started pi­lot pro­grams with some non­bank lenders to of­fer loans with less than 3% down. The loans re­quire the bor­rower to have 3% eq­uity, but lenders gift bor­row­ers money to meet the eq­uity thresh­old as long as the bor­rower doesn’t even­tu­ally pay for it through higher fees or in­ter­est rates — which now av­er­age about 3.9% for a 30year fixed loan.

Pi­lot pro­grams with Guild Mort­gage of San Diego and United Whole­sale Mort­gage of Michi­gan re­quire the bor­rower to put down 1% of their own money. A pi­lot through Move­ment Mort­gage al­lows a bor­rower to put down noth­ing.

Fred­die Mac also al­lows 1%-down loans with the lender mak­ing a 2% gift, but an­nounced last month it would bar the prac­tice start­ing in Novem­ber. Bor­row­ers will still be able to put 1% down if they use money from fam­ily or gov­ern­ment pro­grams to reach 3% eq­uity.

David Bat­tany, Guild’s ex­ec­u­tive vice pres­i­dent of cap­i­tal mar­kets, said it launched its 1%-down pro­gram to “ad­dress the down pay­ment chal­lenge, es­pe­cially in Cal­i­for­nia.” It was also strug­gling to com­pete with lenders that had pre­vi­ously launched very-low­down-pay­ment op­tions.

“We were los­ing busi­ness,” Bat­tany said.

Guild Mort­gage’s pro­gram was wel­come news for win­ery owner Mark Blan­chard and his wife, Kalle, a nurse.

De­spite mak­ing a de­cent liv­ing, the cou­ple es­ti­mated they would wipe out their sav­ings if they put 20% down on a home in Healds­burg, a Sonoma County town that’s a hot spot for tech work­ers to pur­chase a sec­ond house.

So this year, they put only 1% down to pur­chase a more than $400,000, three-bed­room town­house a short walk from down­town.

“This re­ally was a dream come true for us, as lo­cals, to buy within our own com­mu­nity,” Blan­chard, 38, said. “The re­sponse from my peers … was, how is that pos­si­ble? How did you buy in this town?”

Debt vs. in­come

An­other re­cent change af­fects how much debt a prospec­tive bor­rower is al­lowed to carry as a per­cent­age of gross in­come.

Af­ter the hous­ing cri­sis, Fan­nie Mae es­tab­lished a debt-to-in­come cap of 45%, ex­cept for those who put at least 20% down and could show they had enough sav­ings to pay their mort­gage for 12 months if they lost their job. Ex­cep­tions were also made if a bor­rower re­ceived in­come from some­one who lived in the house but was not on the loan.

Last month, Fan­nie did away with those spe­cial re­quire­ments, raising its cap to 50%.

Fred­die Mac said it’s al­lowed 50% without spe­cial ex­cep­tions since 2011, but Fan­nie Mae is larger. A re­cent anal­y­sis by the Ur­ban In­sti­tute called Fan­nie’s new pol­icy “a win for ex­pand­ing ac­cess to credit” and es­ti­mated it would lead to 95,000 new loans be­ing ap­proved an­nu­ally na­tion­wide.

The change is al­ready help­ing bor­row­ers qual­ify, said Julie Aragon, a Santa Mon­ica mort­gage bro­ker.

“We ran a few [ap­pli­ca­tions] yes­ter­day,” she said Tues­day, a few days af­ter the change went into ef­fect. “They weren’t ap­proved on Fri­day and got ap­proved [Mon­day] — one at 48% and an­other one at 49%.”

Though bor­row­ers with a debt-to-in­come ra­tio be­tween 45% and 50% won’t have to meet hard-and-fast re­quire­ments, Fan­nie said they still must prove they are less risky than most, maybe by hav­ing a higher credit score.

Fred­die Mac also re­cently launched pi­lot pro­grams that al­low bor­row­ers to use in­come from house­hold mem­bers not on the loan, an ef­fort it said was de­signed to in­crease op­por­tu­ni­ties for Lati­nos, who of­ten live in multi­gen­er­a­tional house­holds.

Stu­dent loans

With the ex­plod­ing cost of higher ed­u­ca­tion caus­ing some stu­dents to bor­row more than $100,000, sev­eral changes are di­rectly tar­get­ing young home buy­ers typ­i­cally bur­dened with hun­dreds, if not thou­sands, of dol­lars in monthly stu­dent­loan pay­ments.

Among Fan­nie Mae’s changes:

If a bor­rower has some stu­dent loans or other non­mort­gage debt paid by par­ents or oth­ers, those pay­ments will no longer count to­ward their debt-to-in­come ra­tio.

Once bor­row­ers be­come home­own­ers, Fan­nie will al­low them to qual­ify for a cheaper cash-out re­fi­nance if they use it to pay off their high-in­ter­est stu­dent loans.

If a stu­dent loan bor­rower is en­rolled in an in­come-based re­pay­ment plan, the lower monthly pay­ment can be used when cal­cu­lat­ing a debt-to-in­come ra­tio. Be­fore, lenders of­ten had to use 1% of the out­stand­ing stu­dent loan bal­ance as the monthly pay­ment.

The fi­nal change could help peo­ple like at­tor­ney Chris Blay­lock, who said he and his wife earned $150,000 last year but carry roughly $260,000 in stu­dent debt.

Blay­lock, 30, said they tried to buy a home more than a year ago but gave up when a loan of­fi­cer ex­pressed sur­prise at their bal­ances and de­manded lots of pa­per­work.

“My par­ents got a house at a pretty young age,” he said. “I never thought it would be such a strug­gle.”

The cou­ple could be pay­ing more than $3,000 a month in stu­dent loan pay­ments, Blay­lock said, but they have qual­i­fied for an in­come-driven plan that has low­ered that to $600. If he’s judged only on his re­duced pay­ments, Blay­lock thinks he’ll have a bet­ter shot. “It’s pos­si­ble that could change the equa­tion,” he said.

An­other bub­ble?

Last decade lenders of­ten re­quired no doc­u­men­ta­tion and freely dished out loans with risky op­tions such as neg­a­tive amor­ti­za­tion, which kept monthly pay­ments ar­ti­fi­cially low by al­low­ing the prin­ci­pal bal­ance to rise rather than fall.

Now, be­cause of the Dodd-Frank Act, lenders must en­sure that bor­row­ers have the abil­ity to re­pay their mort­gages. And many have even stricter un­der­writ­ing than Fan­nie and Fred­die man­date.

For all the changes, Laurie Goodman of the Ur­ban In­sti­tute char­ac­ter­ized them as “very mar­ginal.” Ac­cord­ing to an Ur­ban In­sti­tute in­dex, loans today are less risky than from 2000 to 2002, a pe­riod when Goodman con­sid­ered lend­ing stan­dards rea­son­able.

Ce­cala of in­dus­try pub­li­ca­tion In­side Mort­gage Fi­nance said lenders and Fan­nie and Fred­die are “tin­ker­ing” around the edges to get more peo­ple into loans, for ex­am­ple, by al­low­ing a higher debt-to-in­come ra­tio but man­dat­ing high credit scores in re­turn.

“In the olden days, you would see loos­en­ing across the board,” he said. Now, “it’s mov­ing the nee­dle a lit­tle more.”

Ce­cala also noted the riski­est mort­gages dur­ing the bub­ble were not pur­chased or guar­an­teed by Fan­nie and Fred­die, but rather bun­dled into mort­gage-backed se­cu­ri­ties that didn’t carry their back­ing. He said he doesn’t ex­pect a rush to ease stan­dards un­til in­vestors re­gain an ap­petite for such prod­ucts.

For their part, Fan­nie and Fred­die say they are mak­ing re­spon­si­ble moves to ex­pand credit and ad­e­quate safe­guards re­main in place.

‘Slip­pery slope’?

Pinto from the Amer­i­can En­ter­prise In­sti­tute said the changes will only juice de­mand, caus­ing home prices to spi­ral out of con­trol. That’s be­cause buy­ers can now qual­ify for a more ex­pen­sive house, but noth­ing was done to fix a sup­ply shortage that’s a ma­jor cause of today’s ex­pen­sive mar­ket, par­tic­u­larly in Cal­i­for­nia.

Pinto called the dif­fer­ing tweaks at Fan­nie and Fred­die a “slip­pery slope” that in the past has caused a “tit for tat” of looser stan­dards at the two com­pa­nies and the Fed­eral Hous­ing Ad­min­is­tra­tion.

That’s in part be­cause changes of­ten don’t re­sult in new bor­row­ers en­ter­ing the mar­ket, Pinto said, but rather peo­ple like the Blan­chards who will now use a 1%-down loan au­tho­rized by Fan­nie Mae, rather than pick­ing a 3.5%-down FHA loan. “You get more risky lend­ing and you drive up prices,” Pinto said.

David H. Stevens, pres­i­dent of the Mort­gage Bankers Assn., called the re­cent changes a pos­i­tive devel­op­ment but said cau­tion is needed.

“We need to be care­ful not to be on a slip­pery slope where we go too far,” he said. “As long as it’s done re­spon­si­bly it’s a good thing.”

Daniel Be­jar For The Times

Mark Boster Los An­ge­les Times

SOME buy­ers are us­ing 3%-down loans for houses in cities such as San Juan Capis­trano. The loans through Fan­nie or Fred­die are mostly capped at $424,100.

Kevin El­li­son

KALLE and Mark Blan­chard put just 1% down to buy a town­house for more than $400,000 in the Sonoma County city of Healds­burg.

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