Comeback for mortgages

Reportedly, mortgages are getting easier to secure by buyers, and the primary reason for that is that banks are originating fewer home loans in the first quarter this year.

Since the economic downturn in 2008, the banks’ mortgage business has been dependent upon government involvement rather than new mortgages and refinancings. Banks were giving loans to government entities (e.g., Fannie Mae and Freddie Mac) that guarantee the repayment of the loans. The banks then bundle and sell the mortgages to investors for a profit.

But as mortgage rates tick up from the low rates last year, the need for refinancings and new mortgages has lessened. The Federal Reserve has fueled the demand for refinancing by keeping interest rates very low. According to analysts, these low interest rates are “unsustainable,” but the economy continues to show signs of improvement. Home prices are starting to rise in many areas and home buyers are increasingly getting off the fence and purchasing.

While the mortgage requirements are still challenging, especially for those with blemished credit, there are indicators that some regional lenders and mortgage insurers are “easing up.” They are even offering loans that are reminiscent of those provided during the peak of the real estate market. For example, borrowers may take out two mortgages at the same time (i.e., mortgage and a line of credit) to avoid the private mortgage insurance required on traditional mortgages for more than 80% of the home’s market value. These are known as piggyback loans.

Another loan product making its reappearance is the 100% loan in stabilized markets and in markets that have significantly improved. The primary source for these loans is credit unions. This time around, however, banks are extending them to borrowers who can afford to repay them. In other words, the banks extend this type of loan to borrowers who don’t need them.

In the past several years, traditional mortgages were made where borrowers provided a down payment of at least 20% and had an average credit score of 760. Underwriters of the lenders are starting to adjust one requirement for a loan at a time. Should a borrower put down at least 20%, they will accept a slightly lower credit score.

After the economic downturn, some home buyers had less money to put down, but reasonable credit scores. These borrowers typically turned to the Federal Housing Administration (FHA). The FHA insures mortgages meeting specific guidelines enabling loans and it filled a large void in enabling loans. However, the FHA has been increasing its fees for this insurance. Now borrowers are also able to get private mortgage insurance from providers relaxing some of their requirements.

When home buyers are in a competitive bidding situation for a property, they often turn to the FHA because frequently they are in the upper ranges of what they can afford.

As for the larger banks, they are indicating that they are making more loans with lower down payments with mortgage insurance in certain areas. More flexibility in lending will certainly improve the real estate market and economy.

 

Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

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