By Gino Blefari, President & CEO, Intero Real Estate Services, Inc.
Access to mortgages has been a hot-button issue ever since the days of the housing boom. Back then, the issue essentially was loose underwriting that swayed so far in one direction that we ended up with a slew of borrowers who were in over their heads.
Then, as the housing recession set in and regulators started coming down on lenders, we saw a reverse in the opposite direction. For many months, lending became so tight that a lot of people no longer qualified to borrow money for a home.
A couple of interesting news items cropped up this past week on this story thread:
- Federal officials came out and said they will delay any reduction in the maximum size of mortgage loans eligible for backing by Fannie Mae and Freddie Mac until next spring at the earliest. This is significant because it enables more borrowers to qualify for loans that tend to have better terms. Loans within the limits (called “conventional”) typically carry slightly lower interest rates and easier qualification standards than so-called “jumbo” loans that are above the limits. It can be especially significant for those borrowers in high-cost areas.
- A new academic paper was published that discusses how the latest reforms in housing finance have had a disproportionate impact on households with less wealth, and offers ways to ensure qualified borrowers in this category can get mortgages going forward. Co-authors were Lewis Ranieri (the co-creator of the mortgage-backed security), Kenneth Rosen, Mark Goldhaber and Andrea Lepcio. Among their suggestions was having a borrower with a lower credit score complete a financial education course before becoming eligible for a loan. This would enable lenders to serve this group with restrictions rather than cut them out completely. The authors also touched on offering more rental programs with an option to buy as a way of easing borrowers into the financial commitment of home ownership. You can read more detail about all of their ideas here.
This is a significant conversation because as noted above, we want to avoid a situation with lending standards that sways too far into either direction – too loose or too strict. Too loose and we risk creating another foreclosure crisis; too strict and we risk locking out an entire segment of borrowers who are qualified but can’t fit into the tight guidelines that have been set up for underwriting.
While many markets have plenty of demand to sustain housing sales right now, it’s still important to ensure qualified borrowers aren’t being shut out – especially for the lower end of the market. We’ll continue to watch these developments through next year.