Experts: Housing stuck in neutral because rules are too tight
The housing market remains stuck in neutral, despite federal programs to jump-start it, because mortgage lending standards that were too liberal less than a decade ago have become too stringent, say mortgage experts.
That's especially true of guidelines from government enterprises Fannie Mae and Freddie Mac, whose historical mission has been to facilitate credit for aspiring homebuyers, they say.
"Three years ago, if a borrower had a credit score of 650 or above, you'd qualify for the best rate the market offered," said David Rzepski, vice president and co-owner of Integrated Financial Group Inc., a mortgage banking firm in Newtown, Bucks County. "Now it takes 740 or above."
Down payment requirements are much stiffer, too. Years ago, Fannie Mae and Freddie Mac allowed lenders to make loans to borrowers putting little or nothing down.
"Those days are gone," said Rzepski, whose firm writes mortgages throughout the Mid-Atlantic, including Pittsburgh. "A typical down payment today is 5 percent, if not 10 percent, and that's with good credit scores."
With 30-year, fixed-rate mortgage rates about 4.1 percent, a 60-year low, lots of homeowners want to refinance their mortgages, but many find it more difficult, he says.
Someone with just 3 percent equity in their home could refinance their mortgage a few years ago, says Rzepski. Guidelines now require 10 percent.
"The pendulum of underwriting standards has swung back to an extreme," said John Johnson, CEO of MortgageAmerica Inc., a mortgage banking firm in Birmingham, Ala.
In addition, Fannie Mae and Freddie Mac are forcing lenders to repurchase loans sold to Fannie and Freddie far more often than in previous years. The pair own about half of the nation's $10 trillion in outstanding mortgages.
"Any technical error or omission or flaw in the loan documentation will result in a repurchase demand from Fannie and Freddie," said Johnson, a 45-year mortgage industry veteran.
For example, MortgageAmerica had to buy back a loan it made in 2003 because after the property was foreclosed on recently, Fannie Mae found the septic tank lay just outside the property boundary, a technical inaccuracy in loan documentation.
"Over the last three years, especially in the last three to six months, the rigidity of enforcement of documentation and other requirements by Fannie and Freddie has intensified dramatically," he said. "It's having a chilling effect on lending."
The mortgage experts also say that government also has done a poor job of designing and communicating to homeowners the federal programs it created amid the financial crisis in early 2009 that were meant to keep people in their homes.
"Borrowers in Pittsburgh need different help than borrowers in Florida," said Patrick Rice, president of the Mortgage Bankers Association of Southwestern Pennsylvania.
"Florida mortgages are underwater, so it's impossible for them to get refinancing," said Rice, a loan officer at Patriot Lending Services Inc., Carnegie. "But what might help someone in Florida might not help people here."
The Obama administration announced steps to shore up homeownership and the housing industry this week by enhancing a program for homeowners "underwater" on their mortgages because of declining home values. The expanded Home Affordable Refinance Program, or HARP, would allow hundreds of thousands of people to refinance even though their home values had fallen well below what they owe on their mortgages.
With historically low interest rates, refinancing would save homeowners thousands of dollars a year, which would assure they could afford their homes for years. It would also boost the listless housing market that is holding back the nation's economic recovery, economists say.
HARP needed a tune-up because it produced only 894,000 home refinancings -- far below the 4 million to 5 million envisioned when the program was introduced in 2009. The revised version is scheduled to last until the end of 2013.
The U.S. housing industry remains sluggish, according to the National Association of Realtors. Existing homes sold at an annualized rate of 4.9 million units in September, only slightly ahead of the 4.77 million rate in June, which marked a 14-year low.
"The reason more people haven't taken advantage of these programs is not enough consumers know about them," said Andrew Dodd, vice president and regional manager of the mortgage department at FifthThird Bank, which as about 15 offices in Western Pennsylvania.
"People don't call us up and say, 'I want to participate in the HASP program,'" said Dodd. The Homeowner Affordability and Stability Plan, or HASP, also introduced in 2009, was also meant to spur refinancing of certain types of mortgages but came with a web of qualifiers that confused many homeowners in need.
"It's difficult for the consumer to grasp the complexity of how these programs work and who qualifies for them," said Rhoan Hernandez, senior vice president and director of real estate services for First National Bank, Hermitage, which as 63 offices in the region.
Experts say qualifications for federal programs created in 2009 meant to help troubled homeowners are often too confusing and stringent for many of them.
"While the ideas are good, the criteria often didn't match the end goals," said Kevin Laird, vice president at Howard Hanna Mortgage, O'Hara.
"It's unrealistic to think borrowers could be as much as four months behind in their payments and yet still have a credit score above 680," said Laird. "Yet that's one of the criteria for one of these programs."Additional Information:
Here are the state's leading lenders of mortgages for low- to moderate-income borrowers and the number of loans sold to the Pennsylvania Housing Finance Agency.
1. Sovereign Bank: 601
2. Howard Hanna Financial Services: 586
3. West Penn Financial Service Center: 410
4. Jersey Shore State Bank: 386
5. Gateway Funding Diversified Mortgage Services: 375
6. Wells Fargo Home Mortgage: 349
7. Boulevard Mortgage Co. of Pa.: 339
8. Allegheny Mortgage Corp.: 305
9. Huntingdon Valley Bank: 289
10. Fulton Mortgage Co.: 215
Source: Pennsylvania Housing Finance Agency