Published: Saturday, 13 Apr 2013 | 12:00 AM ET
By: Tara Siegel Bernard
What was so unusual about Phillip Ratliff's experience in getting approval for his first mortgage was that it wasn't difficult at all — even though he could afford a down payment of only 5 percent.
In the years after the housing bubble burst, borrowers had to practically promise their firstborn child to secure a mortgage.
And while the requirements are still pretty rigorous, particularly for those with less than perfect credit, there are signs that at least some regional lenders and mortgage insurers are beginning to ease up. Some regional banks and credit unions are even offering products that vaguely resemble the more aggressive financing that became all too common during the boom days and eventually got many borrowers into trouble.
The piggyback loan, for instance, is back, mortgage lenders and brokers said. That is when borrowers take out two mortgages simultaneously (or a mortgage and a line of credit) so they can avoid the private mortgage insurance required on traditional mortgages for more than 80 percent of the home's value.
And some credit unions, including Navy Federal and NASA Federal Credit Union, are offering 100 percent financing, at least in markets where home values have stabilized and appear to be on the upswing. U.S. Bank and Wells Fargo said they still allowed borrowers to use piggyback loans.
The big difference this time, lenders and mortgage brokers say, is that the loans are not being made to just anyone but to borrowers who can afford to pay them back (at least for now).
''This is all good news for consumers,'' said Guy Cecala, publisher of Inside Mortgage Finance. ''We are starting to see some loosening, but it's very specific. It's just in its infancy now, and it's not the type of piggyback loans or low down payment loans that we saw before.''
(Read More: Boomers a Boon to Urban Home Builders)
And while there were clearly too many confusingly complex loans offered to too many unqualified borrowers at the height of the housing boom, what is being offered now seems reasonable, Mr. Cecala said. How far the lenders will eventually go to stand out from the competition remains to be seen. ''The real question,'' he said, ''is, Will they be any more dangerous than what we've seen before?''
Lenders are beginning to be more accepting of merely average loan candidates, in certain circumstances. According to Mr. Cecala, traditional mortgages in the last several years were largely made to people with down payments of at least 20 percent and a strong average credit score of 760.
''That is phenomenally tough underwriting,'' he said. ''Now, what you are seeing is that lenders are willing to tinker with one element at a time. So if someone is putting at least 20 percent down, they will go down to 720. And if someone has a 760 or a 780 credit score, they might be willing to go up to a 95 percent'' financing, he added, referring to a mortgage for 95 percent of the home's value.
After 2008, many borrowers with little money to put down, and decent but not perfect credit, had little choice but to look to the Federal Housing Administration. The F.H.A., which does not make loans but insures mortgages that meet its guidelines, filled the hole left by the more traditional lenders: it extended credit to people who had as little as 3.5 percent to put down and spotty credit scores. As a result, the number of new mortgages originated by the F.H.A. ballooned.
But now, mortgage lenders and brokers say, more homeowners with smaller down payments are able to use private mortgage insurance. That is because the private insurers, which imposed even stricter qualifying standards than some banks during the housing downturn, are also becoming a bit more flexible. At the same time, the F.H.A. has been significantly increasing its fees over the last couple of years to shore up its finances and encourage more traditional lending again .
''We were frequently in the position where we could underwrite the loan but we couldn't find the mortgage insurance,'' said Brian Thielicke, a partner and senior loan officer at Cobalt Mortgage in Tukwila, Wash. ''Now, it's completely gone the other way.''
Mr. Ratliff, a 27-year-old software tester, said he had no real trouble getting a mortgage for the four-bedroom house in Seattle that he bought for $325,000. He got a 30-year mortgage with a fixed rate of 3.5 percent.
''There was money out there if you had the credit,'' Mr. Ratliff said, adding that he had a good credit score. Finding an affordable first home proved the hard part, since there were so many other buyers to compete with and few homes in his price range.
He was able to make a down payment of 5 percent, or about $16,000, because he obtained private mortgage insurance. He borrowed another $15,000 or so from his 401(k) to cover closing and other costs, including the insurance. (He paid $5,800 upfront so he could avoid monthly insurance payments.) His overall monthly payments, about $1,700 and another $200 for the 401(k) loan, will be only slightly more than what he paid in rent.
It appears that more borrowers are taking out mortgages similar to Mr. Ratliff's. Fannie Mae acknowledged, in its 2012 annual report, that it was buying more mortgages where the loan amounts were higher relative to the homes' values. Part of the reason was that the mortgage insurance companies reduced their premiums for loans with higher credit scores (the average credit score on the Fannie loans purchased was still strong at 755) and F.H.A. loans had become more expensive.
Fees on F.H.A.-backed mortgages have been inching higher for several years. Borrowers must pay an upfront mortgage premium of 1.75 percent of the loan amount, which can be rolled into the mortgage. But as of April 1, another fee, the annual mortgage insurance premium, rose to 1.35 percent from 1.25 percent of the loan, which is broken down into monthly payments. And while this monthly mortgage premium was typically canceled once the mortgage amount fell to less than 78 percent of the original loan value (after a minimum of five years), starting in June, the insurance must generally be paid for the life of the loan.
''This will be the game changer for many future borrowers,'' said Rick Cason, a branch manager at Integrity Mortgage in Orlando, Fla. ''No one is going to want to take a loan out where mortgage insurance is guaranteed for the life of the loan. You would simply have to be forced into it because there were no other financing options available and you were desperate.'' (Private mortgage insurance can be canceled once the loan amount is less than 80 percent of the home's value.)
Some lenders, including credit unions, are making more flexible loans that they are keeping in their own portfolio. Navy Federal, for instance, is offering members up to 100 percent financing without requiring private mortgage insurance, though the loans carry a slightly higher interest rate, about 4.125 percent for borrowers with good credit histories. (The average rate on a 30-year fixed-rate mortgage was 3.43 percent for the week ending April 11, along with a fee of 0.8 percent of the mortgage amount, according to Freddie Mac.)''Even through the recession, our mortgages performed very well,'' said Jack Gaffney, executive vice president of lending at Navy Federal.
NASA Federal Credit Union -- which is open to many consumers, not just NASA employees -- is offering some members with strong credit and income up to 100 percent financing, without mortgage insurance, for primary homes in Maryland, Virginia and the District of Columbia, all markets it says are on the rebound.
As for the big banks, many of them said they continued to offer mortgages with low down payments. Bank of America said it allowed up to 95 percent of the home value to be financed, with mortgage insurance, in certain regions. Citibank said it offered loans with down payments of less than 20 percent with insurance, too. Wells Fargo and U.S. Bank let qualified borrowers take out two loans -- one for 80 percent of the home's value and the second for 10 percent, along with a 10 percent down payment -- which lets them avoid private mortgage insurance.
That type of piggyback loan structure ''has become more available and we are seeing it more frequently,'' said Erik Johansson, vice president of mortgage lending at Guaranteed Rate, a mortgage lender in Schaumburg, Ill.
The problem, according to Mr. Thielicke of Cobalt Mortgage, is that some borrowers are considering home equity lines of credit, with adjustable interest rates, for the second loan. While they may be able to afford the loan now, that could change.
''It's a good short-term product if you can pay it off in two years or so,'' he added. ''But if you're not, I'm cautioning against it because the rate will adjust up substantially once rates start going up.''
Besides, he said, those loans often require borrowers to pay interest only. ''You are renting that mortgage,'' he added.
Still, for some borrowers, F.H.A.-backed loans will remain the only option since they permit people to carry a little more debt relative to their income (compared with loans backed by Fannie Mae and Freddie Mac) and are a bit more forgiving to other blemishes, like a bankruptcy within the last two years.
''It's a lot more accommodating a product,'' said Paul Reid, a market manager at Redfin, a real estate broker. ''When people are trying to make a competitive offer and find themselves in a bidding war, they oftentimes find themselves back in F.H.A. because they are trying to push the barrier of what they can afford.''
By: Tara Siegel Bernard
What was so unusual about Phillip Ratliff's experience in getting approval for his first mortgage was that it wasn't difficult at all — even though he could afford a down payment of only 5 percent.
In the years after the housing bubble burst, borrowers had to practically promise their firstborn child to secure a mortgage.
The piggyback loan, for instance, is back, mortgage lenders and brokers said. That is when borrowers take out two mortgages simultaneously (or a mortgage and a line of credit) so they can avoid the private mortgage insurance required on traditional mortgages for more than 80 percent of the home's value.
And some credit unions, including Navy Federal and NASA Federal Credit Union, are offering 100 percent financing, at least in markets where home values have stabilized and appear to be on the upswing. U.S. Bank and Wells Fargo said they still allowed borrowers to use piggyback loans.
The big difference this time, lenders and mortgage brokers say, is that the loans are not being made to just anyone but to borrowers who can afford to pay them back (at least for now).
''This is all good news for consumers,'' said Guy Cecala, publisher of Inside Mortgage Finance. ''We are starting to see some loosening, but it's very specific. It's just in its infancy now, and it's not the type of piggyback loans or low down payment loans that we saw before.''
(Read More: Boomers a Boon to Urban Home Builders)
And while there were clearly too many confusingly complex loans offered to too many unqualified borrowers at the height of the housing boom, what is being offered now seems reasonable, Mr. Cecala said. How far the lenders will eventually go to stand out from the competition remains to be seen. ''The real question,'' he said, ''is, Will they be any more dangerous than what we've seen before?''
Lenders are beginning to be more accepting of merely average loan candidates, in certain circumstances. According to Mr. Cecala, traditional mortgages in the last several years were largely made to people with down payments of at least 20 percent and a strong average credit score of 760.
''That is phenomenally tough underwriting,'' he said. ''Now, what you are seeing is that lenders are willing to tinker with one element at a time. So if someone is putting at least 20 percent down, they will go down to 720. And if someone has a 760 or a 780 credit score, they might be willing to go up to a 95 percent'' financing, he added, referring to a mortgage for 95 percent of the home's value.
But now, mortgage lenders and brokers say, more homeowners with smaller down payments are able to use private mortgage insurance. That is because the private insurers, which imposed even stricter qualifying standards than some banks during the housing downturn, are also becoming a bit more flexible. At the same time, the F.H.A. has been significantly increasing its fees over the last couple of years to shore up its finances and encourage more traditional lending again .
''We were frequently in the position where we could underwrite the loan but we couldn't find the mortgage insurance,'' said Brian Thielicke, a partner and senior loan officer at Cobalt Mortgage in Tukwila, Wash. ''Now, it's completely gone the other way.''
Mr. Ratliff, a 27-year-old software tester, said he had no real trouble getting a mortgage for the four-bedroom house in Seattle that he bought for $325,000. He got a 30-year mortgage with a fixed rate of 3.5 percent.
''There was money out there if you had the credit,'' Mr. Ratliff said, adding that he had a good credit score. Finding an affordable first home proved the hard part, since there were so many other buyers to compete with and few homes in his price range.
He was able to make a down payment of 5 percent, or about $16,000, because he obtained private mortgage insurance. He borrowed another $15,000 or so from his 401(k) to cover closing and other costs, including the insurance. (He paid $5,800 upfront so he could avoid monthly insurance payments.) His overall monthly payments, about $1,700 and another $200 for the 401(k) loan, will be only slightly more than what he paid in rent.
It appears that more borrowers are taking out mortgages similar to Mr. Ratliff's. Fannie Mae acknowledged, in its 2012 annual report, that it was buying more mortgages where the loan amounts were higher relative to the homes' values. Part of the reason was that the mortgage insurance companies reduced their premiums for loans with higher credit scores (the average credit score on the Fannie loans purchased was still strong at 755) and F.H.A. loans had become more expensive.
Fees on F.H.A.-backed mortgages have been inching higher for several years. Borrowers must pay an upfront mortgage premium of 1.75 percent of the loan amount, which can be rolled into the mortgage. But as of April 1, another fee, the annual mortgage insurance premium, rose to 1.35 percent from 1.25 percent of the loan, which is broken down into monthly payments. And while this monthly mortgage premium was typically canceled once the mortgage amount fell to less than 78 percent of the original loan value (after a minimum of five years), starting in June, the insurance must generally be paid for the life of the loan.
''This will be the game changer for many future borrowers,'' said Rick Cason, a branch manager at Integrity Mortgage in Orlando, Fla. ''No one is going to want to take a loan out where mortgage insurance is guaranteed for the life of the loan. You would simply have to be forced into it because there were no other financing options available and you were desperate.'' (Private mortgage insurance can be canceled once the loan amount is less than 80 percent of the home's value.)
Some lenders, including credit unions, are making more flexible loans that they are keeping in their own portfolio. Navy Federal, for instance, is offering members up to 100 percent financing without requiring private mortgage insurance, though the loans carry a slightly higher interest rate, about 4.125 percent for borrowers with good credit histories. (The average rate on a 30-year fixed-rate mortgage was 3.43 percent for the week ending April 11, along with a fee of 0.8 percent of the mortgage amount, according to Freddie Mac.)''Even through the recession, our mortgages performed very well,'' said Jack Gaffney, executive vice president of lending at Navy Federal.
NASA Federal Credit Union -- which is open to many consumers, not just NASA employees -- is offering some members with strong credit and income up to 100 percent financing, without mortgage insurance, for primary homes in Maryland, Virginia and the District of Columbia, all markets it says are on the rebound.
As for the big banks, many of them said they continued to offer mortgages with low down payments. Bank of America said it allowed up to 95 percent of the home value to be financed, with mortgage insurance, in certain regions. Citibank said it offered loans with down payments of less than 20 percent with insurance, too. Wells Fargo and U.S. Bank let qualified borrowers take out two loans -- one for 80 percent of the home's value and the second for 10 percent, along with a 10 percent down payment -- which lets them avoid private mortgage insurance.
That type of piggyback loan structure ''has become more available and we are seeing it more frequently,'' said Erik Johansson, vice president of mortgage lending at Guaranteed Rate, a mortgage lender in Schaumburg, Ill.
The problem, according to Mr. Thielicke of Cobalt Mortgage, is that some borrowers are considering home equity lines of credit, with adjustable interest rates, for the second loan. While they may be able to afford the loan now, that could change.
''It's a good short-term product if you can pay it off in two years or so,'' he added. ''But if you're not, I'm cautioning against it because the rate will adjust up substantially once rates start going up.''
Besides, he said, those loans often require borrowers to pay interest only. ''You are renting that mortgage,'' he added.
Still, for some borrowers, F.H.A.-backed loans will remain the only option since they permit people to carry a little more debt relative to their income (compared with loans backed by Fannie Mae and Freddie Mac) and are a bit more forgiving to other blemishes, like a bankruptcy within the last two years.
''It's a lot more accommodating a product,'' said Paul Reid, a market manager at Redfin, a real estate broker. ''When people are trying to make a competitive offer and find themselves in a bidding war, they oftentimes find themselves back in F.H.A. because they are trying to push the barrier of what they can afford.''
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