Home prices are rising across the country and mortgage rates, though still historically low, are up since the presidential election.
Simply put, buying a home isn’t easy, especially in high-cost metropolitan areas such as Los Angeles County, where the median price of a home hit $569,000 in June.
But changes in the mortgage industry are afoot, with the goal of loosening some of the strict standards established after the subprime crisis — rules some blame for impeding sales.
“The reality has sunk in that there are buyers out there who will be able to buy homes and make the mortgage payments,” said William E. Brown, the president of the National Assn. of Realtors. The industry is “trying to give them more options to buy a house.”
Government-controlled mortgage giants Fannie Mae and Freddie Mac are paving the way by rolling out new programs to encourage home ownership.
The companies, with their congressional mandate to promote home ownership, don’t originate loans, but purchase mortgages from lenders to keep the market moving. And any changes they make in the underwriting standards for the loans they buy can have a big effect.
Also, lenders are moving to relax some standards partly because they fear losing business as home prices and mortgage rates rise, said Guy Cecala, publisher of Inside Mortgage Finance.
“If your business is going to drop 20%,” he said, “you need to come up with ways to offset that.”
The changes bring lending nowhere near the easy-money bonanza of last decade, which ended in financial crisis. But they have brought criticism from some corners that liberalizing rules for down payments and how much debt a borrower can have is a slippery slope that could eventually lead to another bubble.
“This is what happened last time,” said Edward Pinto, a fellow at the American Enterprise Institute, a conservative think tank.
’98’00’02’04’06’08’10’12’14’16015304560%Californians who can afford the median priced homeAndrew Khouri / @latimesgraphicsSource: California Assn. of Realtors
Reduced down payments
During the bubble, borrowers could often put down nothing at all by financing the entire purchase.
After the crash, standards tightened considerably and federal regulators even floated a proposal to require 20% down for many mortgages, which would amount to $113,800 in order to buy a median-priced home in Los Angeles County as of June.
For a low-down-payment option, borrowers usually had to turn to the Federal Housing Administration, which allows 3.5% down, but requires costly mortgage insurance for the life of the loan.
Now, borrowers increasingly have more options, though generally they need a good credit score.
The trend started in late 2014 when Fannie Mae and Freddie Mac announced new programs that allowed loans with as little as 3% down. But many large banks still reeling from the housing bust that cost them billions were skeptical. Bank of America Chief Executive Brian Moynihan said his company was unlikely to participate.
“I don’t think there’s a big incentive for us to start to try to create more mortgage availability where the customers are susceptible to default,” he told a conference in 2014.
But less than two years later, the bank started offering 3% down loans through a partnership with Freddie Mac. Wells Fargo, the nation’s largest mortgage lender, also jumped in last year, partnering with Fannie Mae. JPMorgan Chase now offers 3% down loans as well.
“We are seeing more and more lenders adopting it every day,” said Danny Gardner, Freddie Mac’s vice president of affordable lending and access to credit.
The 3% down loans through Fannie or Freddie are capped at $424,100 in most of the country, including California.
Bank of America launched its program with Freddie Mac after partnering with a nonprofit to provide financial counseling for the life of the loan, a spokesman said. After six months, BofA upped its annual origination cap from $500 million to $1 billion for the Affordable Loan Solution Program, which allows down payments as low as 3%.
Some are going even lower.
This year, Fannie Mae started pilot programs with some non-bank lenders to offer loans with less than 3% down. The loans require the borrower to have 3% equity, but lenders gift borrowers money to meet the equity threshold as long as the borrower doesn’t eventually pay for it through higher fees or interest rates — which now average about 3.9% for a 30-year fixed loan.
Pilot programs with Guild Mortgage of San Diego and United Wholesale Mortgage of Michigan require the borrower to put down 1% of their own money. A pilot through Movement Mortgage allows a borrower to put down nothing.
Freddie Mac also allows 1% down loans with the lender making a 2% gift, but announced last month it would bar the practice starting in November. Borrowers will still be able to put 1% down if they use money from family or government programs to reach 3% equity.
David Battany, Guild’s executive vice president of capital markets, said it launched its 1% down program to “address the down payment challenge, especially in California.” It was also struggling to compete with lenders that had previously launched very low down payment options.
“We were losing business,” Battany said.
Guild Mortgage’s program was welcomed news for winery owner Mark Blanchard and his wife, Kalle, a nurse.
Despite making a decent living, the couple estimated they would wipe out their savings if they put 20% down on a home in Healdsburg, a Sonoma County town that’s a hot spot for tech workers to purchase a second house.
So this year, they put only 1% down to purchase a more than $400,000, three-bedroom townhouse a short walk from downtown.
“This really was a dream come true for us, as locals, to buy within our own community,” the 38-year-old Blanchard said. “The response from my peers … was how is that possible? How did you buy in this town?”