Editor's Note: This select print feature originally appeared in the June 2016 issue of MReport magazine.
By Brian A. Lee
The famous movie line, “There’s no place like home,” has a whole new meaning when one looks at the downward homeownership trend these days. In first quarter 2016, the rate dropped to 63.5 percent, only one tenth of a percentage point above the 48-year low experienced the prior year, according to the U.S. Census Bureau.
“There’s been a combination of forces that’s created a unique marketplace,” says Cam Melchiorre, President and CEO of HLP, a nonprofit technology-based mortgage solution-provider. “That calls for some extraordinary responses to help normalize things and open the housing market up to traditional volumes, certainly not the volumes that were reflective of the boom years or bubble years, but a more rational market.”
Despite many economic and demographic challenges, many housing pros believe that, like Dorothy in “The Wizard of Oz,” this story will havea happy ending.
“I believe the desire to own a home is strong and natural in our country,” says Danny Gardner, Freddie Mac VP of Single Family Affordable Lending and Access to Credit, who expects the number of homeowners to nearly double, from 5.5 million to 10.1 million, by 2020.
The path to homeownership is not as simple as merely following the yellow brick road. Some would rather face an army of flying monkeys than make that trek while also dealing with rising home prices, student loan debt, and other financial obstacles. There are many difficulties facing borrowers, even more after the industry took its required medicine in the recovery from the housing downturn.
“All borrowers are facing much tighter credit thresholds than is necessary to finance a safe and sustainable mortgage,” says Marietta Rodriguez, VP of homeownership products and lending for NeighborWorks America. The Washington, D.C.-based organization directly supports a network of more than 240 nonprofits with technical assistance, grants, and training for 12,000-plus professionals in affordable housing and community development. “The pendulum on credit swung too far after the mortgage crisis, now more than eight years later, and while credit has certainly eased from then, it is still too expensive and restrictive.”
Melchiorre at Baltimore-based HLP says, “It’s a combination of the reaction to the crisis, which was an extreme regulatory environment of underwriting rules, eligibility rules, capital requirements against lending that have been created. There’s a generation now of people who need financing who’ve gone through that recession and have emerged on the other side with credit deficiencies. Those factors are hindering an otherwise favorable financial environment with historically low interest rates.”
With loan origination becoming more and more expensive, lenders are increasingly concerned about repurchase risk and, as a result, add overlays to reduce the chance of default, according to Gardner, who calls such overlays the biggest challenge facing borrowers today. Lower credit scores by aspiring homeowners mean higher risk, which translates into higher costs.
Rodriguez says, “The lending market today has too many additional risk-adjusted costs that are layered onto the cost of a mortgage being made to a borrower without perfect credit. Those costs are making the mortgage prohibitively expensive. Eliminating many of these risk adjustments could open up the pathway to mortgage finance for many more borrowers.”
The NeighborWorks America VP maintains that lenders must consider the full history of a borrower when underwriting a mortgage and better recognize that low down-payment homebuyers are not as risky as previously regarded.
She adds, “Borrowers should have some skin in the game, meaning some of their own money into the deal, but increasing the affordability by utilizing down-payment assistance programs only makes the home more affordable and thus more sustainable long term for that buyer.”
Another major barrier, one more understood on the consumer side of the equation, is the lack of adequate credit. Many younger adults, who perhaps live with their parents and avoid using credit cards, find it difficult to establish the credit needed to qualify for a mortgage. And some hurdles are not in the credit rating of the borrower, but in his or her head instead. Rather than bliss, ignorance can be a miss, as in a missed opportunity for homeownership.
“I think we all know the most common misperceptions include the beliefs that you need perfect credit to qualify for a mortgage and a 20 percent down-payment to buy a home,” says Gardner. He maintains that other potential borrowers think low down-payment mortgages are only for first-time homebuyers and that the down-payment must come entirely from their own funds. “In fact, second or third-time buyers are eligible for mortgages with 3 or 5 percent down-payments, and they can use grants or gifts to cover all or part of that.”
While consumers face many hurdles in the loan process and lenders must constantly manage risk and regulations, Rodriguez thinks the latter can and should do more, starting with properly valuing homebuyer education and counseling.
A study by the Urban Institute for NeighborWorks America found that buyers who have received the association’s homeownership education and counseling were significantly less likely to default early in the mortgage payback period. Compared to non-National Foreclosure Mitigation Counseling (NFMC) homeowners, counseled mortgagers are nearly twice as likely to receive a “cure” for their serious delinquency or foreclosure. They are about 1.5 times more likely to avoid mortgage re-entry into a troubled status after receiving a loan modification fix, and nearly three times as likely to receive a loan modification cure. In fact, NFMC-counseled homeowners receiving a modification had their annual mortgage payment reduced by an average of $4,980. The counseling option not only is a recognized tool for reducing risk, but it builds relationships.
“When working with a borrower who a lender might immediately dismiss as not credit-worthy, our advice is to be patient,” Rodriguez says. “Help the borrower connect with a housing counselor, work with her while she improves her credit and collects the necessary documentation to make it through underwriting. Owning a home is a long-term commitment. I think that it’s not too much to ask a lender to take a longer-term view of helping a PHFA customer get the right mortgage.”
Consumers obviously should do their homework before starting the home-buying process. After all, it’s the biggest purchase most people make in their lifetimes. They need to know that not all lenders offer all products, and shopping around for a mortgage is “essential” to finding a financing package best suited for them. Rodriguez says that housing counselors often are aware of loan products that are not typically on the traditional loan officer’s radar.
“For example, housing finance agencies have loan products specifically designed for low down-payment borrowers, and in many cases these products don’t require mortgage insurance, which helps with affordability,” she adds.
Loan production at the Pennsylvania Housing Finance Agency in 2015 increased 27 percent over the previous year. As of April 1, 2016, the PHFA, which offers a network of counseling agencies to provide potential borrowers the resources they need before applying for a mortgage. PHFA has assisted nearly 163,000 families and individuals in achieving the American dream of homeownership by providing total funding in excess of $12.5 billion. The goal is to help Pennsylvanians not only qualify for a mortgage, but also be a successful homeowner over the long term.
“They may not be able to purchase a home right now, but with no-cost homebuyer services provide by PHFA, homeownership often can be obtainable,” says Kate Newton, Homeownership Director at the 44-year-old agency, hitting on the relationship-centric service theme versus the transactional.
In 1982 when PHFA’s Homeownership Division was established, first-time homebuyers and families with special needs were the focus, but now the agency also caters to repeat and move-up buyers, families and single people with attractive interest rates, lower fees and a mortgage tax credit program that boost mortgage affordability. Whitehall, Pennsylvania-based Mortgage America recently received top honors for the third consecutive year in PHFA’s ranking of its lending partners.
Newton echoes Gardner’s point that prospective homebuyers should not get hung up on that “most common misconception” that a 20 percent down-payment is required to purchase a home. The PHFA, which requires that borrowers contribute the lesser of at least 1 percent of the home sales price or $1,000, connects Keystone State consumers with down-payment, closing cost, county assistance programs, and more.
“Our proactive and high-touch servicing for the life of the loan promotes a positive, long-term relationship with the borrower,” adds Newton.
How has HLP been received in the mortgage marketplace? Having the top six commercial banks and 22 of the top 25 as clients certainly speaks volumes. The neutral, national and non-profit utility—“we’re a technology company that’s really a social enterprise,” says Melchiorre—acts as a digital highway system to efficiently connect all the important industry stakeholders for the purpose of resolving issues affecting mortgage readiness for prospective homeowners. HLP, which launched in December 2015 the HLP.guru app to help people qualify for homeownership, not only facilitates much-needed accessibility, transparency, consistency and customer service in the mortgage process, it proves that the greater good is not just a talking point.
Give & Learn
Financing a home purchase can feel like a long, arduous military campaign to many, but knowing is indeed half the battle. Or maybe even more. One’s mortgage choice cannot be too informed.
“Education is the most important first step,” says Newton.
PHFA’s counselors assist borrowers in developing budgets, setting financial goals, analyzing and repairing credit, and determining how much of a home they can afford. Then they connect the prospective mortgagors with the more than 80 lending partners throughout the state of Pennsylvania to identify the PHFA first-mortgage program that works best for them.
“I strongly believe that pre-purchase education from a trusted non-profit advisor is a sound way to tackle home-buying challenges and dispel uncertainties grounded in home-buying myths,” Gardner says.
Freddie Mac created the Home Possible mortgage to provide low down-payment (5 percent) opportunities for borrowers with less than perfect credit. About a year ago, Home Possible Advantage was launched enabling borrowers without perfect credit to put down as little as 3 percent for a conforming, conventional mortgage, with the possibility of full payment coverage from gifts or grants. To qualify for these products, borrowers can earn up to 100 percent of their area median income or higher in high-cost markets. Gardner says lenders have reacted “very positively” to the Home Possible loan program.
“Quicken [Loans] and other leading lenders are using Home Possible Advantage to test their own approaches to affordable housing finance that I believe our industry will be able to learn from,” he adds.
“Education is the most important first step.”
Kate Newton, Homeownership Director, PHFA
Freddie Mac products, partnerships and platforms are predicated on improving financial access and consumers’ knowledge base. To further its goals of housing liquidity, stability, and affordability, the 46-year-old GSE works with trusted non-profit organizations like Easter Seals and many real estate industry groups. “Not only are we out there educating them and their constituents, but we’re also providing a whole suite of tools like our Credit Smart financial literacy curriculum and our online information for both consumers and our partners,” Gardner says.
“Lenders have reacted positively to our expanded financial coaching efforts and to our continued growth with housing counseling,” says Rodriguez of NeighborWorks America. “We strongly believe that informing consumers about the mortgage process by linking them with a trained housing counselor is good business for lenders.”
Having partnered with financial institutions for years, NeighborWorks America boasts an impressive outreach program in the name of housing affordability. In fiscal year 2014 alone, 108,500 customers were counseled and educated through its extensive network, and over 28,000 more people have received financial coaching during the last two years through NeighborWorks organizations.
“Since the housing market has begun to turn around, and mortgage rates remained historically very low, we’ve increased our emphasis on building the business base of our nonprofit network,” Rodriguez says. “Some of the funding to train our organizations to be more efficient when working with lenders has come from the lending community itself.”
In order to attract more clients to the housing counseling program and move them more easily into the final mortgage process, NeighborWorks America has helped its network of more than 240 nonprofit organizations invest “significant amounts of money” in upgrading their technology platforms. Essential to boosting the nonprofit partners and leveraging private sector capital, NeighborWorks America announced in March that it will distribute more than $60.5 million in flexible grants to the network in 2016.
Call to Action
In this era of the Consumer Financial Protection Bureau, there is still a long way to go for people to be truly protected and prepared, especially regarding the biggest purchase of their lives. Consumer confidence is a common economic term, of course, but maybe consumer knowledge should be as well.
“The media has done a great job in explaining how costly homeownership has become in many markets,” says Rodriguez at NeighborWorks America. “Where it has not done so well is educating consumers on the ways to potentially overcome those cost barriers. Low down-payment mortgages are evolving, sources of down-payment assistance are growing. There are hundreds of millions of dollars in assistance available, and most people don’t know about it.”
In a recent homeownership survey, NeighborWorks found that 70 percent of consumers are not aware of down-payment assistance programs for middle-income homebuyers, a deficiency Newton at PHFA also broached.
The targeted outreach and messaging by the public and private players in the mortgage industry must continue to improve as well. HLP constitutes an impressive example given that more than 6,000 non-profit HUD-certified housing counselors at more than 1,100 agencies nationwide use its web-based system to submit foreclosure alternative applications to approximately 2,000 registered mortgage company users.
Gardner at Freddie Mac speaks of the critical role that each player in the housing community should play, including real estate professionals, housing finance agencies, originators, servicers, the government and the GSEs.
“There is an urgent need to restore and strengthen the affordable lending ecosystem that connects aspiring homebuyers with the institutions and non-profits created to help them realize their full potential as successful homeowners,” he says. “Since the health of this ecosystem will have a major impact on the future of the housing market, it is the focus of all our outreach efforts.”