BofA: Charting the Future of Responsible Lending

Bank of America is taking steps to cut the Federal Housing Administration out of the equation with its latest mortgage product, dubbed the “Affordable Loan Solution.” The new program will allow borrowers to put a mere 3 percent down on conforming loans, and it will require no private mortgage insurance—regardless of the total amount of the loan.

According to D. Steve Boland, consumer lending executive at BofA, the program fills a much-needed void for lower-income buyers in the market.

“There is a need in today’s marketplace for more responsible mortgage products that enable creditworthy homebuyers—who meet certain income limits and other requirements—to become homeowners at an affordable entry point with comprehensive counseling,” Boland said.

The program is a joint effort between BofA, Freddie Mac, and the Self-Help Ventures Fund, a credit union based in Durham, North Carolina. Once available, the loans may be more affordable than those offered currently by the FHA—especially since no PMI will be required. And according to the Wall Street Journal, Boland thinks the market needs these affordable non-FHA options when it comes to mortgage lending.

“We need an alternative in the marketplace that helps creditworthy borrowers with a track record of paying debts on time,” Boland said. “We think there are still a lot of uncertainties out there in working with FHA.”

Terry Francisco, VP of Corporate Communications at BofA, told MReport that the new program provides just such an alternative. In fact, BofA expects that three out of the four mortgages generated under the Affordable Loan Solution would have otherwise been backed by the FHA.

“This product that we’ve developed in partnership with Freddie Mac and with Self-Help Fund provides an effective alternative for FHA that’s somewhat less expensive, but also structured in a way that we believe will make people successful homeowners and will provide another option for people who are looking to become homeowners or people who could be moving up from one home to another,” Francisco said. “We think it adds more options for low- to moderate-income individuals to either attain homeownership for the first time or move up in the marketplace.”

Though it’s meant as a competitor to FHA, requirements for BofA’s program will be slightly different from the FHA’s. In in order to qualify for the program, borrowers will need a FICO credit score of at least 660, as well as a household income that’s less than the median income of the region. When significant credit history is lacking, Francisco said BoFA will also consider “non-traditional forms of credit.”

“What we mean by that is if someone has a thin file, where they don’t have a lot of credit cards or other experience paying debts, if they paid rent on time or if they paid health memberships, cell phone bills—things like that—if they can that they’ve had a strong history of paying those bills on time, that’s acceptable as non-traditional credit,” Francisco said.

Francisco said he thinks the new loan options will allow BofA to better serve the hard-to-reach millennial generation, as well as other in-need home buyer segments.

“We know that oftentimes student debt and other issues can be tough for that generation to overcome,” Francisco said. And because the product is structured like a conforming loan, but without the private mortgage insurance element, the point of entry is easier. “There’s not that extra mortgage insurance payment people need to make per month,” he said.

Starting Monday, the loans will be available through all BofA mortgage lending channels, and once originated, Self-Help will buy the loans, as well as their servicing rights. Freddie Mac will then purchase any of the eligible mortgages that stem from the BofA-Self-Help partnership, and Self-Help will take a first-loss position, losing the largest chunk of profits on any loans that go default. In order to prevent this from occurring, Self-Help will also provide post-closing counseling to any high-risk borrowers or homeowners who are struggling to pay.

Despite their high risk in the equation though, it seems Self-Help CEO Martin Eakes is more than excited about the new venture.

“Homeownership remains the best way for families of modest means to build wealth and stability,” Eakes said. “The Affordable Loan Solution partnership will help ensure that deserving borrowers can get a fair mortgage to buy a home and build their own American dream.”

BofA has said it will cap loan production at $500 million annually.