Lenders Further Relax Standards as Prices Soar
August 7, 2017
As home prices continue to rise, some mortgage lenders are loosening their underwriting standards so borrowers can purchase property sooner. “The reality has sunk in that there are buyers out there who will be able to buy homes and make the mortgage payments,” William E. Brown, president of the National Association of REALTORS®, told mortgage industry news website OriginatorTimes.com. The industry is “trying to give them more options to buy a house,” he added.
Mortgage giants Freddie Mac and Fannie Mae are rolling out new programs to spur homeownership, and some lenders are moving to relax standards to avoid losing business as home prices and mortgage rates rise, says Guy Cecala, publisher of Inside Mortgage Finance. “If your business is going to drop 20 percent, you need to come up with ways to offset that,” he says.
Some analysts caution that this shouldn’t create fear about lenders returning to the lax standards that were commonplace prior to the last housing crash. At that time, some mortgage borrowers didn’t have to put any money down to buy a home. Still, others in the industry warn lenders to be vigilant against creating another unsustainable housing boom by relaxing underwriting rules. “This is what happened last time,” says Edward Pinto, a fellow at conservative think tank American Enterprise Institute.
Underwriting standards still remain stricter than in the past. Though borrowers have more loan options, such as 3 percent down mortgages, they typically must meet credit requirements to qualify. Also, Fannie Mae and Freddie Mac’s 3 percent down loans are capped at $424,100.
Following the housing crisis, Fannie established a debt-to-income cap of 45 percent, making an exception for borrowers who put at least 20 percent down and could show they had enough savings to pay their mortgage for 12 months if they lost a job. But last month, Fannie did away with those special requirements and raised its cap to 50 percent. Fannie says borrowers with a debt-to-income ratio between 45 percent and 50 percent still have to prove their creditworthiness in order to get a loan. The Urban Institute called Fannie’s new policy “a win for expanding access to credit” and estimated it would lead to the approval of 95,000 new loans annually.
Freddie Mac also recently launched a pilot program to allow borrowers to use income from household members not on the loan. Freddie officials said the move was to help increase opportunities for Latinos, who often live in multigenerational households. Laurie Goodman of the Urban Institute says that, overall, the changes lenders are making are “very marginal.” The Urban Institute index shows that loans today are still less risky than they were between 2000 and 2002, a time period when lending standards were considered “reasonable,” the institute says.
Source: “As Prices Rise, Mortgage Lenders Are Making it Easier to Buy a House,” OrignatorTimes.com (Aug. 5, 2017)
Updated: June 20, 2018