Easier home loan rules worry some
It's getting easier for people without much money in the bank to buy a home, triggering concerns that the nation is setting the stage for another housing bust.
The government has lowered down-payment requirements and cut mortgage insurance rates for people putting down less than the conventional 20 percent. The moves are designed to open home-ownership to more people, especially younger, first-time buyers with decent incomes who have not saved tens of thousands of dollars.
Edward Pinto, codirector of the American Enterprise Institute's International Center on Housing Risk, worries the steps are the first onto a slippery slope that leads back to the years before the 2008 financial crisis — the origins of which have been blamed on a housing boom driven by low or no down payments and easy credit.
“The problem with that is the risk of default goes up as the down payment goes down and the FICO score goes down,” Pinto said, referring to the credit score calculation developed by Fair Isaac Corp. “We've seen this movie before and how it plays out.”
Fannie Mae, a government-controlled company that buys or guarantees mortgages, in December said it would offer home loans that required a 3 percent down payment, also known as a 97 percent loan-to-value mortgage. The lowest down payment loan available before then was 5 percent.
“Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, an executive vice president at Fannie. “We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”
Smaller sibling Freddie Mac will begin offering the loans next month. The two companies, which required bailouts during the financial crisis, own or guarantee about half of all U.S. mortgages, worth about $5 trillion.
Kendra Ross was pre-approved for a 3 percent down-payment mortgage by WesBanco Inc. in December and has been looking for a home in the Hill District. The 39-year-old first-time homebuyer grew up in Pittsburgh but lived in New York City for 20 years before moving back here in August. She's been living with her mother and working with the Hill Community Development Corp.'s Hill District 100 homebuying program.
She was interested in the 3 percent down-payment mortgage because it would allow her to buy a house without exhausting her savings.
“It would be easier for me if I didn't have to spend it all ... in case there are things I want to do around the house,” she said.
Sam Lombardo, 47, of Mt. Lebanon was pre-approved for a 3.5 percent down-payment loan backed by the Federal Housing Administration and hopes to close on his purchase in Beechview in April.
The bartender at Rivers Casino said he could have scraped together 20 percent down for the house, but it would have involved depleting his savings and borrowing against his retirement savings plan.
“I just figured what I was pre-approved for and what I can afford,” he said. “I don't want to be house poor. ... It does make it nice when these FHA loans only do the 3.5 percent. It makes it more affordable.”
Officials point out that today's low down-payment loans are not of the subprime variety that were made to people with poor credit. And the new loans are subject to strict underwriting standards, such as a minimum credit score of 660, income documentation and low levels of existing debt.
“The underwriting processes now are a lot more stringent,” said Dana DiVecchio, a mortgage banker with Holland Mortgage Advisors in Robinson. “Gone are the days of coloring outside the box.”
Mortgage bankers and brokers expect the loans to spur more first-time buyers to shop for homes.
“So often one of the major obstacles in getting into a home is coming up with sufficient savings,” said Mike Flynn, a mortgage banker and owner of Keystone Financial Services in Ross.
“A reduction in down-payment requirements always helps that many more people get qualified to buy,” he said.
Also expected to help is a cut in mortgage insurance rates by the FHA, which said last month that it would reduce rates by 0.5 of a percentage point.
The rate on an FHA-backed loan with less than 5 percent down dropped to 0.85 percent, from 1.35 percent. Real estate website Zillow said the rate cut will save $818 a year for a person with a $175,000 mortgage.
The lower premium is predicted to help about 250,000 people to purchase a home, according to the Obama administration.
Pinto warned that the recent actions to boost home-ownership appear “eerily similar” to those taken in the early 1990s, which he said helped lead to the housing bubble and financial crisis.
So far, credit standards remain fairly tight. However, Pinto argued, the agencies are always looking for additional ways to bring in more buyers.
“The government will figure out a way to loosen (credit) further,” he said.
“That's a problem when the taxpayers are guaranteeing all these loans,” he said.
Alex Nixon is a staff writer for Trib Total Media.