Banks start to loosen mortgage standards
Real estate agent Mickey Knickerbocker was as surprised as anybody when her client closed on a $905,000 Manhattan Beach, Calif., town house using “piggyback” financing: a two-mortgage deal designed to minimize the down payment.
Popular during the housing boom, piggybacks all but disappeared after the mortgage meltdown taught banks and regulators a big lesson: Borrowers needed to have skin in the game. So the loans seemed like a throwback to the days of carefree lending, especially on such a pricey property.
“I don't think, a year ago, I could have gotten loans that would have served this purpose,” Knickerbocker said. “I didn't even know that this was going to be possible.”
With home prices rising, risk is creeping back into mortgage lending. In addition to creative down-payment arrangements, mortgages on high-end properties — so-called jumbo loans — have gotten plentiful and cheap. Meanwhile, banks are accepting borrowers with lower credit scores and allowing them to take on more debt relative to their incomes, experts and industry professionals say.
“We are definitely not seeing the looseness we saw during the boom years, but it seems to me that the pendulum is swinging back,” said Erin Lantz, director of real estate website Zillow.com's mortgage market.
The relaxing of standards comes as banks rely more heavily on new home loans to replace big profits from the recent boom in refinancing, driven by historically low rates. As demand for refinancing declines — and interest rates start to rise — some analysts say an improving economic outlook will cause banks to lower standards further.
It's hard to gauge exactly how banks are changing their rules. But some data indicate buyers are putting less down these days. Ellie Mae, a software provider that tracks U.S. mortgage transactions, estimates that the typical down payment for a purchase mortgage has fallen from 22 percent in early 2012 to about 20 percent in recent months. In the case of refinancing, the average amount of equity required in a loan has fallen from 35 percent to about 27 percent over that same period.
From March 2011 to March 2013, Zillow's Mortgage Marketplace saw nearly a sevenfold increase in the number of lenders offering mortgages with down payments of 3.5 percent to 5 percent, the company said. And those loans were not Federal Housing Administration loans, which allow down payments of as little as 3.5 percent.
Major banks say they are making new mortgage loans to buyers a major focus. In California, Wells Fargo also lowered the size of its down payments on certain loans from 10 percent to 3 percent, said Larry Garcia, Los Angeles coastal area sales manager.
“We have had a huge emphasis on the purchase market for really quite some time,” Garcia said.
Bank of America has noticed interest from buyers who are looking to expand into bigger homes.
“The overall economic picture is certainly better,” said Franco Terango, an executive with Bank of America Home Loans. “The overall picture from an equity standpoint is better for folks who are interested in moving up.”
And financing options that were widely unavailable during the bust are starting to return.
“More people want to buy, and prices are going up. So the banks are willing to loan,” Glendora, Calif., real estate agent Zak Bushey said. “They wouldn't be lending with little down if they thought there was any chance that (prices) were just going to stay here, or come back down.”
The return of piggyback loans is a clear sign of mortgage bankers' shifting outlook. Typically, such arrangements allow buyers to take one mortgage for 80 percent of the home's value, and a second mortgage for 10 percent, allowing the buyer to put down a lot less cash.
Paying higher interest on the second mortgage, about 5.25 percent in today's market, can cost less than private mortgage insurance, typically charged on all loans in which the buyer has less than 20 percent equity in the property.
Piggyback loans can be used to help borrowers avoid the higher interest rates on jumbo mortgages — loans too large to be sold to mortgage giants Freddie Mac and Fannie Mae.