By Dan Provost
The federal government remains one of the biggest instigators of change in the mortgage-lending business. Consider the changes that have hit the mortgage industry since 2008: the Home Affordable Modification Program and Home Affordable Refinance Programs (HARP) have brought both frustration and relief to homeowners and mortgage professionals; the Federal Housing Administration (FHA) has changed its lending guidelines, making it more difficult for credit-challenged consumers to qualify for government-insured loans with 3.5 percent down payments; and the FHA, Fannie Mae and Freddie Mac have changed their lending limits.
And these changes are just the beginning. On March 1, the government is set to unveil the detailed guidelines for what many are calling HARP 2.0, the second version of the government’s Home Affordable Refinance Program. Chicago-area lenders say they are hopeful that this version of the program will make it easier for Chicago homeowners who are underwater on their mortgage loans to refinance.
There is more trepidation among lenders about the government’s Dodd-Frank law and the theory of “qualified mortgages.” Under Dodd-Frank, lenders are required to take all the steps necessary to make sure that their borrowers can actually repay the mortgage loans they receive. This law is a response to the high number of loan defaults and housing foreclosures that have hit the country since 2008. Problem is, lenders don’t yet know what requirements they’ll have to meet to make sure they are making what the government refers to as “qualified” mortgages, and they won’t know potentially until this spring when the government finally unveils its new guidelines.
“The bottom line is that we hope the government and federal regulators will understand the needs of everyday Americans who want to own a home,” said Michael Crossett, executive vice president of mortgage banking in the Naperville office of Chicago Bancorp. “Owning a home remains an important part of the American dream, and we hope the government will do what is necessary to make this possible for people. To me, that means supporting a robust secondary market and allowing lenders to price all appropriate risks into mortgage-backed securities. It also means simplifying the mortgage-loan process with one simple home-loan application that pre-empts all the state disclosures that we have to deal with. The more the government can do to make or repeal laws that facilitate those goals, the better off we’ll all be.”
Under the original HARP program, added Betsy Lidecker, vice president of residential lending with the Chicago office of Blueleaf Lending, HARP allowed home-owners to refinance as long as the size of their mortgage did not exceed 125 percent of their property value. Unfortunately, fewer than one million mortgages have been refinanced under HARP.
But under the new version of HARP, this limit will be scrapped. Homeowners, then, can qualify for HARP 2.0, even if they owe $270,000 or more on a home valued at $200,000.
“With HARP 2.0, the 125 percent loan to value cap was removed, allowing even the most underwater of homeowners to refinance on favorable terms, as long as they are current on their mortgage payments,” Lidecker said. “Most importantly, HARP 2.0 will eliminate institutions’ potential for losses on any refinanced mortgages as a result of buy-backs due to underwriting defects. The one disadvantage to HARP 2.0 is that homeowners in a better equity position (less than 80 percent loan-to-value) won’t qualify for many of the relaxed credit standards accorded to the more risky loans.”
Is the Government Helping?
To Lidecker, this is potentially good news that should be welcome to homeowners who are desperate to take advantage of today’s historically low interest rates.
“In theory, this is a great thing,” Lidecker said. “But the official guidelines are not being released until March 1. We don’t know all the details yet. But if it does allow for a higher loan-to-value ratio, that can only be a good thing for homeowners. This should open refinancing to a lot of people who, in the past, haven’t been able to qualify. There is a large segment of people who are extremely frustrated, and for one reason or another, they haven’t been able to fit into the guidelines set up by Fannie Mae and Freddie Mac.”
Evan Klee, area sales manager in the Highland Park office of Fifth Third Bank, says he is eager to see the new HARP guidelines. The earlier version of these government programs weren’t perfect, but they did help a significant number of homeowners either stave off foreclosure or refinance into loans with lower rates, he said.
“The government programs helped many people,” Klee said. “Without those programs, we would have seen even more people lose their homes to foreclosure. You can’t please everybody, but they have been great tools. The programs certainly have been a positive, in my opinion.”
Many would like to see the government take steps to create a simple universal mortgage loan application that would supersede the application forms individual states use. This would hopefully reduce the number of individual state disclosures that lenders and borrowers have to deal with to close a loan; a handful of counties in Chicago require buyers to fill out specific disclosure statements that buyers in the rest of the state don’t. This creates unnecessary work for everyone.
“Simplifying the process benefits everyone,” Crossett said. “With a simple loan application that is uniform across the country, the mortgage-lending process can become far more streamlined.”
“The people with jumbo loans are important, too. Their homes have lost value, too,” Klee says, adding he’d like to see the government provide help to borrowers who have taken out jumbo loans. Just because these borrowers have spent more, doesn’t mean that they, too, haven’t suffered during this time when housing values continue to fall.
“Why don’t they get the same benefits as everyone else?” Klee says. “Why can’t they qualify for these government programs? That’s something that I don’t understand, and it’s something that I’d like to see change.”
“I personally have not been doing many investment purchase loans,” Brian Costello of Guaranteed Rate in Oak Brook said. “By getting the investors back into the real estate market, this will reduce the supply of homes on the market. By reducing the supply of homes, this will increase values. If we can get values increased, this will do so much to help the people who are underwater.”
The government can also provide a boost to the housing market by enacting regulations encouraging investors to invest in residential housing. When more investors enter the housing market, the entire economy benefits, Costello said.
Credit scores have also become a bigger issue. Lenders today reserve their lowest interest rates for borrowers with the highest credit scores, while borrowers with low credit scores will struggle to qualify for conventional mortgage loans. Even FHA-insured loans now require that borrowers have FICO credit scores of at least 580 if they want to qualify for loans with down payments of 3.5 percent. Those borrowers with scores under 580 will have to come up with down payments of 10 percent to qualify for an FHA-backed loan, while those with scores under 500 aren’t eligible for FHA financing at all.
These stricter credit score guidelines are coming at a time where consumers’ credit scores have fallen. FICO reported that during 2008 and 2009, about 50 million consumers saw their FICO credit scores fall by more than 20 points. At the same time, about 21 million consumers saw their scores fall by more than 50 points.
Washington Post real estate writer Kenneth Harney reported earlier this month that loans originated for purchase or guaranteed by Fannie Mae and Freddie Mac are now given to borrowers with average FICO credit scores of 760 or higher. New mortgages insured by the FHA are now given to borrowers with average scores of just higher than 700, Harney writes.
This contrasts with the housing boom years, where borrowers could qualify for a low interest rate with scores of 620 to 640. It also contrasts with a few underwritten loans, according to Lidecker. For Refi Plus, a manual underwrite, the minimum FICO score is 620. In addition, it appears that the FICO requirements for DU Refi Plus, an automated underwrite, are not any different than what they have been, meaning that if DU accepts it, then the score is acceptable. To clarify, Lidecker says, this does not mean that every file with a 620 or higher FICO will be approved, as the agencies are continually refining their automated underwriting parameters.
At the same time, mortgage lenders, burned by the number of defaults they’ve seen on their loans, are asking for more documentation from borrowers. This often frustrates those borrowers who haven’t taken out a mortgage loan or refinanced their loans in the last four years.
“The most significant change that buyers are facing today would be the amount of documentation and the level of investigation that is done on every single file,” Lidecker said. “Years ago, we could get away with asking borrowers for a pay stub and a verbal verification that they had jobs. Now there are several levels of verification. In the beginning, people found it extremely annoying. Now it is more of a given. It is a lot more documentation-intensive. Our clients look at that as being a lot more work for them.”
Costello says that borrowers working with Guaranteed Rate must present two years of W-2 statements. They also must present loan officers with their two most recent consecutive pay stubs and their last two months’ bank statements.
Certain problems are more common in today’s lending process, Costello said. Often, loan officers will struggle to verify the source of the deposits in borrowers’ bank accounts. If borrowers have $10,000 in their savings account one day and $25,000 the next, loan officers need to verify where the extra $15,000 came from. That can sometimes prove challenging, especially when borrowers are less than forthcoming.
It’s important for real estate agents to explain to their buyers that it’s part of a loan officer’s job to determine where deposits come from, Costello said. By doing this, agents can ease much of the frustration that buyers might feel during the lending process.
“We have to confirm that the deposit came from an acceptable source,” Costello said. “I have found that borrowers feel frustrated when I bring up these questions. Once I explain that the lender just wants to verify that they did not take out a loan for this money, they understand.”
Condo loans are also challenging today. When closing a condo loan, loan officers must first confirm that the association running the condominium complex is fiscally sound. Problem is, with the high number of foreclosures in the condominium market, many condo buildings do not meet the fiscal requirements of lenders.
That leads to both buyers and sellers who are frustrated, Costello said. Again, agents must prepare both their buyer and seller clients that purchasing and selling a condo can be a challenging task in today’s market; however, with the correct agent/lender, team these obstacles can be overcome.
Other buyers, when approaching lenders, worry that they’ll have to come up with a down payment of 20 percent. That, though, isn’t necessarily true. Klee from Fifth Third says that his bank offers programs – the mortgage-loan product targeted toward doctors is one example – that require down payments of 5 percent or less.
“I don’t see buyers as being nervous,” Crossett said. “But I do see them as being confused. There is a lot of advertising out there. There is a lot of coverage out there of the mortgage industry. They might hear about underwater refinancing, but they have no idea if this is something that they can do. What clients want from us is to be guided so that they can accomplish what they want to accomplish with either purchasing a home or refinancing an existing mortgage loan.”
For instance, some borrowers may qualify for VA or USDA Rural Housing Service loans that come with down payments as low as 0 percent. Klee even says that real estate agents should inform their clients that now is a good time for home buyers to borrow mortgage dollars. Mortgage interest rates are low, of course. But Klee says that buyers should also be excited about the vast array of programs, many offering down-payment assistance, that can help them get into homes today.
“People should be excited about the fact that there are still so many products out there for them,” Klee said. “If I was a consumer looking for a mortgage, I wouldn’t be nervous or frustrated. I’d be the opposite. Consumers today might not think they can qualify for mortgage loans. But because there are so many products out there for them, they might be surprised at what they can do.”