Credit pendulum starting to swing again
July 18, 2014
Credit availability is cyclical, swinging back and forth like a pendulum between the extremes of "easy money" and "tight money". The current ultra-conservative credit standards were implemented following the onset of the housing debacle in 2007 (when lenders and investors introduced non-sustainable mortgage products and bond rating agencies turned a blind eye). Well, the credit pendulum has been stuck for years at the extremely conservative end of the lending spectrum. The real estate industry and value in our homes pretty much drives the national economy so a return to a more normalized credit market is key to our nation's full economic recovery. Finally, calmer heads are starting to prevail and we're seeing the return of more sensible mortgage products and underwriting standards.
The Qualified Mortgage (QM) was the brain child of the Frank/Dodd (FinReg) legislation, evidently authored by bureaucrats who are perhaps not sufficiently familiar with the nuances of real estate lending. For many Americans, the QM mortgage will serve their needs but large and important segments of home buyers/owners (both high-earning and more modest income families) were left without viable mortgage options. In the classic American style, private enterprise has risen to the occasion and filled the void that Washington created. Suddenly, it's possible to buy a home with as little as a one-half of one percent down payment. That means $1,500 down on a $300 thousand dollar home, providing the closing costs are paid by the seller, lender, family member, or a combination of these three. Guidelines apply because this product is intended to help the often underserved communities (though you don't need to be a first time homebuyer). We haven't seen a mortgage product this accommodating in almost a decade! And don't think that just because the home buyer doesn't have a lot of "skin in the game" that they'll be more likely to default. Veterans Administration (VA) mortgages have the lowest default rate of ANY mortgage product and these are zero down payment loans.
Another new offering is the "Pledged Assets" mortgage that allows a buyer to make as little as a ten percent down payment while avoiding mortgage insurance and lowering their house payment. Assets (think of these as cash or investments) are pledged as security for the purchase. For example, if a buyer acquired a $600K home with a $60K down payment, they could pledge assets to make up the difference between the $417K conforming loan limit and what would otherwise be a $540K first mortgage. The benefits include a lower interest rate (than the rate for a mortgage greater than $417K), a lower mortgage payment (thanks to the smaller loan amount and lower interest rate), and no mortgage insurance. Plus, the homebuyer does not have to move their assets and they can continue to trade their investments. The pledged assets don't need to be those of the homebuyer such that a parent could pledge their assets to help their kids buy a home and still retain control and custody of the money. In the example above, the homebuyer saves $704 / month on their mortgage payment and another $160 / month because they don't need mortgage insurance. That's over ten thousand dollars per year in savings – enough to lease that Jaguar F-Type V8 (admit it – you want one!)
There's plenty more to share (but not enough room here). The real "take away" has to be that investors and local agencies are finally back in the game and confident in our country's real estate industry again.
These specialized mortgage products are filling the gap between the Qualified Mortgage (serving the well-established home buyer) and those in need of a product that is more specific. With a surging real estate industry leading the way, our country's economic pendulum is swinging back to good times.
By Mark Treiber, One Trust Home Loans, 207 Kingsbury Grade, (775) 671-3952