As prices rise, lenders lower the bar for buy­ing a house

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - AN­DREW KHOURI

LOS AN­GE­LES — House 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.

But changes in the mort­gage in­dus­try are afoot, with the goal of loos­en­ing some of the strict stan­dards es­tab­lished af­ter the sub­prime cri­sis — rules 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

Brown, the pres­i­dent of the Na­tional As­so­ci­a­tion of Real­tors. The in­dus­try is “try­ing to give them more op­tions to buy a house.”

Gov­ern­ment-con­trolled mort­gage giants Fan­nie Mae, the Fed­eral Na­tional Mort­gage As­so­ci­a­tion, and Fred­die Mac, the Fed­eral Home Loan Mort­gage Corp., are pav­ing the way by rolling out new pro­grams to en­cour­age home­own­er­ship.

The com­pa­nies, with their con­gres­sional man­date to pro­mote home­own­er­ship, 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 per­cent,” he said, “you need to come up with ways to off­set that.”

The changes bring lend­ing nowhere near the easy-money 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.

Dur­ing the bub­ble, bor­row­ers could of­ten 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 per­cent down for many mort­gages.

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

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 per­cent 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.

But less than two years later, the bank started of­fer­ing 3 per­cent-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 per­cent-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 per­cent-down loans through Fan­nie Mae or Fred­die Mac are capped at $424,100 in most of the coun­try.

Bank of Amer­ica started 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, Bank of Amer­ica 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 per­cent.

Some are go­ing even lower. This year, Fan­nie Mae started pi­lot pro­grams with some non­bank lenders to of­fer loans with less than 3 per­cent down.

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

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

Af­ter the hous­ing cri­sis, Fan­nie Mae es­tab­lished a debtto-in­come cap of 45 per­cent, ex­cept for those who put at least 20 per­cent down and could show they had enough sav­ings to pay their mort­gage for 12 months in case of a lost 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 Mae did away with those special re­quire­ments, rais­ing its cap to 50 per­cent.

Fred­die Mac said it’s al­lowed 50 per­cent 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.

With the ex­plod­ing cost of higher ed­u­ca­tion caus­ing some stu­dents to bor­row more than $100,000, sev­eral changes are di­rectly tar­get­ing young home­buy­ers typ­i­cally bur­dened with hun­dreds, if not thousands, of dol­lars in monthly stu­dent-loan 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 debtto-in­come ra­tio.

■ Once a bor­rower be­comes a home­owner, Fan­nie Mae will al­low them to qual­ify for a cheaper cash-out re­fi­nance if they use it to pay off their high­in­ter­est 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-toin­come ra­tio. Be­fore, lenders of­ten had to use 1 per­cent of the out­stand­ing stu­dent loan bal­ance as the monthly pay­ment.

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