Smart shopping can uncover appealing mortgage deals

Kenneth R. Harney

WASHINGTON — For those seeking a home mortgage, lenders’ pain might prove to be your gain.

Mortgage companies are having a challenging year. With total originations of new loans declining as the refinance market shrinks because of rising interest rates, many lenders could be facing red ink and staff layoffs.

Michael Fratantoni, chief economist for the Mortgage Bankers Association, the industry's largest trade group, says the typical lender in the United States may not be profitable when the books are closed on the first quarter of 2018.

The trade publication Inside Mortgage Finance reports that originations tanked during the first three months of the year to their lowest level in three years.

Possibly as a result, competition for new homepurchase loan applications is on the upswing.

One bellwether: Officials at the Lending Tree, the popular online marketplace where banks and mortgage companies compete for borrowers' business, tell me that home-loan shoppers on average are receiving significantly more offers through its lender network compared with a year ago.

“It's getting very competitive,” said Lending Tree chief economist Tendayi Kapfidze, and “lenders are expanding their credit box” to pull in more borrowers.

Another indicator: Lenders appear to be offering slightly more attractive deals. The Mortgage Bankers Association’s mortgagecredit-availability index — which monitors creditscore requirements, down payments and other key underwriting terms at major lenders — improved by 1.9 percent for conventional (nongovernment) mortgages in April.

Still another sign: The latest quarterly Default Risk Index, compiled by credit bureau TransUnion and credit-score developer VantageScore Solutions, found that even though lenders in the auto-loan, student-loan and bank credit-card sectors are tightening terms to applicants, mortgage lenders appear to be easing terms. Lenders seeking higher loan production are willing to take on slightly more risk.

More competition among lenders is always good for consumers, so those seeking a mortgage loan should definitely seek offers from many lenders.

But don’t expect mortgage companies or banks to give away the store. The easing is modest, the capital-market cost of money is broadly the same for most lenders, and the mortgages they close generally have to be acceptable under “ability to repay” and other standard federal rules adopted after the financial crisis. The easing more likely will be felt at the margins of the market — first-time purchasers and borrowers whose debt levels or lack of down-payment cash made them tough to approve in the past, as well as applicants for jumbo loans ($453,100 and up) with cream-puff credit.

Here’s what you might find:

• More flexibility on debtto-income ratios. Investors Fannie Mae and Freddie Mac are allowing lenders to say yes to credit-worthy buyers with ratios as high as 50 percent — up from the previous 45-percent limit.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says the flexibility helps in qualifying buyers with high-debt burdens because of student loans, medical bills, alimony payments and similar burdens. FHA is allowing ratios of 56 percent-plus.

• Heavier use of 3-percent-down loans through Fannie Mae and Freddie Mac programs aimed at qualifying more buyers with moderate incomes.

Gene Mundt of American Portfolio Mortgage Corp. in the Chicago area says first-time buyers who qualify on income and credit scores are the real winners this summer. Plus, in July, Freddie Mac will roll out a new “HomeOne” program solely for first-time purchasers: 3 percent down, no income limits.

• Greater availability of nonqualified mortgage loans for borrowers who don’t fit into the usual underwriting boxes — especially the millions of self-employed individuals whose income patterns are sporadic or depend heavily or solely on sales, commissions and bonuses.

Non-QM loans, which must comply with federal ability to repay rules for borrower and lender safety, come with higher interest rates compared with standard loans, but the rate difference between them is narrowing, said Tom Hutchens of non-QM lender Angel Oak Companies.

Bottom line: Shop aggressively to find better deals.