So-So Credit? Why Expanded Lending is on the Horizon
As the Obama Administration moves in the direction of shutting down Fannie Mae and Freddie Mac in an attempt to shift mortgage securitization into the private sector, expanded lending is likely not too far off in the distant future.
What this means is if you have so-so credit and can’t qualify for a mortgage, fear not. The industry is working in your favor…
Let’s get real: Gone are the days of rampant foreclosures, abundant bank-owned property and distressed property sales.
The overall housing sector has taken a cataclysmic move in the opposite direction, working in lockstep with an improving economy.
As the unemployment rate continues to drop (fell to 7.4 percent this month from 7.6 percent in July), coupled with the fact the Federal Reserve could end its cycle of quantitative easing (purchasing of mortgage securities keeping rates low), confidence in credit products will slowly start to expand, especially if the mortgage market as we know it ceases to exist with the exit of Fannie Mae and Freddie Mac.
Private mortgage lenders will have the ability to change their own individual credit products.
These potential credit products will be considered non-qualified mortgages, which in essence means outside the normal, standardized mortgage.
Expanding Mortgage Lending: Clues Lie In The Economic Data.
Hope for consumers lies in positive economic data surrounding the job market and the subsequent housing sector. These two linchpins hold together the lion’s share of the mortgage market.
As more positive economic data continues to surface, slowly but surely consumers can expect mortgage lenders to follow suit by being less credit picky when it comes to mortgage applications.
Mortgage Tip: The first changes will apply toward the mortgage credit qualifying standards in place today and expand those products first rather than a flight to new product innovation. For example, rather than waiting the typical seven years for a non-government mortgage post-foreclosure, perhaps lenders will be less credit adverse to reducing that time frame to four years.
“Expanded credit will reemerge in the future.
When it does, so will the opportunities.”
Credit qualifying possibilities:
- Even today, some lenders offer 90 percent financing for purchase with no monthly mortgage insurance for the highest credit score type consumer – it’s likely more will follow suit.
- Reducing mortgage insurance premiums for lower credit score borrowers makes loans less pricey, reinvigorating the housing sector.
- Stated income product for self-employed borrowers who have difficulty showing income on 1040’s. In years past, self-employed borrowers would be able to show bank statement deposits as sufficient supporting income.
- The No Ratio loan type could be expected longer down the road, but essentially the loan does not consider a housing or debt ratio against income when determining a consumer’s ability to qualify for the loan. Rather, it would focus on their history of repaying their housing payment and supporting documentation on how they were able to do that for XYZ period of time.
Make no mistake, the likelihood of seeing subprime loans and the predatory products in years past will likely never come into the market again, and rightfully so.
However, individual mortgage banks, local banks and credit unions that have an appetite for residential mortgage loans will almost certainly expand their thresholds on what they will and will not allow based upon their appetite for longer-term performing mortgage assets.
Lenders will adjust for credit risk.
When a lender underwrites a mortgage (analyzing financial components of the consumer’s mortgage application for potential lack of repayment), they weigh a qualifying standard known as compensating factors.
In a nutshell, compensating factors allow for a consumer to be slightly deficient in one area in exchange for being very strong in another.
When the expanded credit qualifying products reemerge into the residential mortgage market, lenders will price their loans on assessment of risk. The higher the risk, the higher the cost.
For example, a borrower looking for a No Ratio product in addition to providing supporting documentation to show repayment history would have to show substantial assets in the bank in order for the lender to consummate the loan.
So if you are self-employed and can’t get a mortgage due to how you file your income, have money for a down payment, are not interested in paying monthly mortgage insurance or your debt ratios are out of whack, hang tight.
Expanded credit will reemerge in the future. When it does, so will the opportunities.
Photo source: sharinglight.com.