Editor's Note: This feature originally appeared in the August issue of MReport.
Are low- and moderate-income homebuyers having difficulty obtaining a mortgage? As late as 2017, the answer to this question was a resounding “Yes.” Recently released numbers on mortgage originations from the Bureau of Consumer Financial Protection prove the point. The data indicates that while home-purchase originations increased from 4 million in 2016 to 4.2 million in 2017, the share of home-purchase loans extended to low- or moderate-income borrowers was only 26.3 percent of total loans originated.
The same report also pointed to a trend that has become more prevalent in the mortgage industry in 2018. Refinance originations in 2017 showed a significant drop from 3.8 million in 2016 to 2.5 million in 2017. Despite purchase loan originations rising, the total number of mortgage originations declined in 2017 by 12.4 percent.
A June 2018 forecast by Freddie Mac found that higher mortgage rates are weighing on refinance activity, and despite an increase in purchase-origination volume, are likely to slow total originations by 6.4 percent by the end of 2018. “Higher home sales and house-price appreciation will drive purchase origination volume up by $60 billion, but not enough to offset the decline in refinances,” the forecast projected. “Full-year originations are therefore forecasted to fall in 2018 to $1.75 trillion and stabilize at $1.74 trillion in 2019.”
The result of these headwinds is a more competitive market. “Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home-price appreciation, which have drastically reduced refinance activity and restrained home-purchase affordability,” said Doug Duncan, SVP and Chief Economist at Fannie Mae, explaining the findings of Fannie Mae’s Q2 Lender Sentiment Survey. “These factors have combined to squeeze mortgage origination volumes and have increased competitive pressures,” added Duncan.
The “restrained home-purchase affordability” mentioned by Duncan has also dampened the interest of potential homebuyers struggling to find their ideal home in what is now largely a sellers’ market. As fewer borrowers come in through the doors to pick up conventional mortgages, lenders and loan officers are rethinking their strategies to look at new avenues and borrower pools to generate revenue.
Enter millennials, those working the gig economy, and those with low credit scores or from low- to moderate-income households who so far have found it difficult to obtain a mortgage.
Nonprime to the Rescue?
Do we, or don’t we? It took lenders a good part of the last decade to answer this question when it came to ledning to nonprime borrowers. And not without reason. The subprime crisis of 2008 remains a bad memory for many lenders. The resultant tightening credit standards and government regulations, along with lenders’ own risk-averse attitudes, left a large pool of borrowers out of the housing market—those with low credit scores, many of who typically belonged to low- and moderate-income households.
More recently, millennial homebuyers dragged down by heavy student loan debt and gig economy workers who didn’t have the ‘proper’ paperwork were also added to this pool.
Today, as lenders look at new avenues for growth in their origination volumes, they’re opening their doors to this pool through products customized to suit the needs of these borrowers.
The early part of 2018 saw the introduction of nonprime mortgage products for a borrower demographic that had credit scores between 520 and 600. These products allow borrowers who have had some housing or life event that resulted in the lowering of their credit score a chance to get a mortgage loan.
LendingTree, the online mortgage-aggregator platform that allows consumers to look at and compare mortgage rates of various lenders, found an increase in the
the average number of offers that borrowers with low credit scores were receiving from lenders on their platform.
“The GSEs have also eased some requirements. For example, last year, Fannie Mae increased its maximum debt-to-income ratio (DTI) to 50 percent from 45 percent,” said Tendayi Kapfidze, Chief Economist at LendingTree. “This allows more borrowers to qualify for mortgages in a rising-price and rising-rate environment.”
Parkes Dibble, Director of Mortgage Product Innovation at Embrace Loans, explained that many people who were impacted during the housing downturn are working themselves out of their prior debt issues. “The downturn was one big event that affected their credit scores, but we believe that they’re still good borrowers for us to make loans to,” he said. Like many nonbanks, Embrace has also introduced a product for this specific borrower segment. The company’s ‘beyond’ product allows borrowers with a major credit event in their past to get a home loan sooner than they otherwise would for more traditional products, such as FHA loans. As an example, “We’ve reduced the waiting time from a prior bankruptcy in our beyond underwriting rules that allow us to lend to people who have had a prior bankruptcy,” Dibble said.
Nonbanks are also ensuring that their products are more well rounded than they were in the pre-crisis era. “There are some legitimate reasons for no-income verification, zero down payment, and lower credit score loans, generally just not all at the same time,” said Jim McQuaig, Branch Manager of Churchill Mortgage’s Herndon, Virginia region.
The big banks, though, are adopting a more cautious approach. “We’re going to see more innovative products as the market continues to change. But we must look at balancing affordability and sustainability in new product design,” said Eric Schuppenhauer, President, Home Mortgage, at Citizens Bank. “I believe that product design is a large part of what got the industry and borrowers into trouble during the 2007-08 housing downturn. We must do all we can to ensure that the industry does not slip back into that type of product innovation in any shape or form.”
Nonqualified (Non-QM) mortgages for borrowers who don’t qualify for conventional loans can also be good performing loans, according to Tom Hutchens, SVP, Sales and Marketing at Angel Oak Mortgage Solutions. “Non-QM has wider guidelines and wider credit availability than agency and government loans.”
New Borrowers, New Products
The Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, along with the FHA are already catering to a pool of underserved borrowers. Today, nonbanks are also looking at this pool that consists of borrowers who are unable to make a large down payment or those who don’t hold a traditional job and therefore, remain unable to get a conventional home loan.
According to Kapfidze, various studies point to the easing of lending standards because of which a wider pool of borrowers can enter the market. Lenders, too, are willing to work with them. “As volumes decline, lenders are more willing to work with borrowers they may not have focused on when business was booming,” Kapfidze said.
“Many investors are introducing non-QM products with a focus on ensuring responsible lending that meets the changing needs of borrowers,” said Michael Kuentz, President of Lenders One, a cooperative of more than 200 mortgage bankers covering the entire mortgage-lending spectrum. “In addition to affordable lending programs, we expect to see more products focused on helping those in the gig economy without traditional income from one employer.”
“The borrower profile is getting more diverse and going forward it will become imperative for lenders to look at creating products that satisfy these new profiles, too,” Schuppenhauer said. “Looking at alternative means of analyzing credit will be one of the most critical components of innovation.”
Despite the growing diversity of underserved borrowers, those with low credit scores remain by far the largest of the pool of borrowers who were shut out, and the industry is taking steps to address their needs as well as it can while also trying to avoid past mistakes. “Agency guides have credit score restrictions,” Hutchens explained. “With non-QM, we look at the entire picture including a borrower’s ability to repay, not just their credit score.”
As lenders woo them, borrowers are looking at which companies can not only give them a great rate but high standards of service as well. “A borrower’s biggest concern is that they don’t want to get taken advantage of. They want to feel in control of the process, and want the process to be fast and efficient,” said Churchill’s McQuaig.
They’re also most concerned about qualifying for a loan and getting to closing, according to Kapfidze. A huge borrower concern is “not knowing whether they will get approved or not,” said Schuppenhauer.
However, according to Dibble, borrowers don’t want to be told “No.” Lenders need a good communication strategy so homebuyers understand the difference between “Maybe we can do the loan,” and “Yes, but here’s what the rate is to do it.”
Educating the borrower is another important aspect to help alleviate their concerns. Over the past year, Lenders One has seen its members come up with programs focused on building a path to affordable housing for borrowers who don’t fit the traditional mold. For example, a program called Duty to Serve spearheaded by the co-op has helped provide more education and paths towards responsibly expanding credit to low- and moderate-income homebuyers.
Education and counseling is also important for many first-time homebuyers who are coming out of the recession with student-loan debt, and according to Kuentz, education is key to “matching borrowers with a product that can set them up to build a better financial future.”
According to Mark Revard, Market President of Oklahoma at Gateway Mortgage Group, borrowers’ main concerns when shopping for a loan are interest rates and closing costs. “For example, a borrower may want an FHA loan, so they’ll shop around to different lenders, looking for an outstanding rate. But when interest rates increase, borrowers get very concerned, so they shop and compare lenders extensively.”
In fact, shopping for rates is increasingly being looked at as a beneficial exercise for customers.
LendingTree, which recently introduced a Mortgage Rate Competition Index, found that even as mortgage volumes fell 10 percent last year, shopping activity for mortgages on the platform grew 25 percent. One of the reasons, Kapfidze said, was because the industry itself was transforming with the increased digitization of the mortgage process that reduced the impediments of searching for and assessing multiple offers.
“As more mortgages are digitally fulfilled, and a younger demographic, the millennials, account for the majority of the housing market, shopping activity will grow,” Kapfidze predicted.
But rates aren’t the only thing that borrowers want. According to Dibble, for every borrower who wants to get a loan without ever sitting across from somebody, there’s another borrower who wants to compare products and work on a loan face-to-face. The right thing is to strike a balance between the two. “When borrowers shop, they’ll find rates, but I still think at the end of the day, borrowers look for people they want to do business with,” Dibble said.
Lenders are feeling the heat of drying up refinance volumes and tough market conditions on their profit margins. “Where am I going to get my next loan?” is a question that loan officers are often asking as they look at replacing the volume void left by the slowdown in refinance volumes. “A lot of loan officers are in the process of reinventing themselves to win customers who are purchasing new homes in a tight purchase market,” said Schuppenhauer.
Kuentz agreed. “Generating leads is the number-one worry for loan officers, as it’s the lifeblood of their business. Referral relationships with realtors are still a mainstay for most, but many are exploring new ways to market and reach the elusive first-time homebuyer, ” he said.
The employment numbers for mortgage officers are as worrying. According to Kapfidze, employment of mortgage and nonmortgage brokers, which was in an upward trend since 2011, peaked at 94,900 in February, and is declining now.
The Fannie Mae Lender Sentiment survey says as much, with cost-cutting jumping from the second-least-important priority in 2017, to the third-most-important one for lenders, coming in after consumer-facing technology, and business-process streamlining.
As companies face the difficult tasks of cutting costs as quickly as possible in a low-volume environment, loan officers are also worried about unexpected changes brought on by corporate decisionmaking. “In tough markets, some companies make rash decisions without input from originators,” said Michael Lee, EVP, National Sales at Planet Home Lending. “They don’t realize that it’s critically important to include branches and sales leadership when making important decisions that can directly affect a loan officer’s business—for example, pricing changes to address margin compression and process enhancements to reduce operating costs.”
Planet Home Lending is encouraging its loan officers to come up with creative ideas to differentiate themselves in today’s competitive market instead. “Our job is to help them identify and execute boutique strategies that will win over potential customers and referral partners for them,” Lee said.
In fact, “the challenge of sustainable origination volumes is what’s getting many originators to see the value of offering non-QM products, so they can help more borrowers,” said Hutchens.
Additionally, “Inventory levels also trouble loan officers, and the inventory issue is a result of what we’re seeing with lenders softening on down payments and property types,” said Revard.
However, according to McQuaig, it’s time for loan officers to adapt instead of worry in the new rate and volume environments. “Loan officers as a group must step up their game and focus on adding value to the mortgage transaction for partners and borrowers alike, instead of serving as a stepping stone in the overall process,” he said.
Towards Sustainable Homeownership
The lending landscape witnessed today has changed since 2017. As regulatory guidelines continue to evolve, lenders, instead of shutting out potential borrowers, are introducing more customization and an increase in products, as well as flexibility around down payments to widen their pool.
“Agencies are now operating with a more flexible approach to nontraditional single-family homes like manufactured housing,” Revard said. “There is now more of a focus on low- to moderate-income households and affordable housing.”
Education is another important aspect to ensure sustained homeownership across a diverse set of borrowers. “Lenders who teach borrowers how to build their credit and find the right loan are making the dream of homeownership a reality for more people across the country,” Kuentz said.
“We’re at one of the lowest homeownership rates in U.S. history right now and I think it’s really important that we continue to look for ways to enable people to put down roots and live the American dream,” Schuppenhauer said.