The credit freeze is starting to thaw.
Mortgage lenders are beginning to ease the restrictive lending standards enacted after the housing boom turned to bust, a sign of their rising confidence in the housing market.
While standards remain tight by historical measures, lenders have started to accept lower credit scores and to reduce down-payment requirements.
One such lender is TD Bank, Toronto-Dominion Bank’s U.S. unit, which on Friday began accepting down payments as low as 3% through an initiative called “Right Step,” geared toward first-time buyers and low- and moderate-income buyers. TD initially launched the program last year with a 5% down payment. It keeps the product on its books and doesn’t charge for insurance. Borrowers also don’t need to put down any of their own cash if a family, state or nonprofit group provides a down-payment gift.
The changes also are a recognition by lenders that the business of refinancing old mortgages, which had been a huge profit center for banks, is nearly tapped out. To generate future profits, banks will have to compete for borrowers who may not have perfect credit or large down payments.
With refinances down sharply, “everybody is fighting for a smaller portion of the originations pie,” said Mike Copley, executive vice president of lending at TD Bank. He said the bank believes the loans will perform well.
Mortgage originations, which reached $1.8 trillion last year and $2 trillion in 2012, are forecast to hit $1.1 trillion this year by the Mortgage Bankers Association. The expected 36% decline this year is due to less refinancing. “With volume dropping as much as it has, many lenders are looking to expand their credit box,” said Michael Fratantoni, the MBA’s chief economist.
The credit thaw has been led by community banks, credit unions and other lenders that largely shied away from the U.S. subprime market during the past decade.
Valley National Bank, a community bank based in Wayne, N.J., lowered down-payment requirements to 5% from 25% this month on mortgages for certain buyers in New York, New Jersey and Pennsylvania. Next month, Arlington Community Federal Credit Union, based in Arlington, Va., will begin accepting 3% down payments on mortgages up to $417,000, down from 5%.
Low-down-payment mortgages never went away after the housing bust. Instead, they shifted from private lenders to the Federal Housing Administration, which insures loans with down payments of just 3.5%.
Over the past year, however, more than one in six loans made outside of the FHA included down payments of less than 10%, the highest share since 2008, according to figures from data firm Black Knight Financial Services. That still is lower than the nearly 44% of the market they accounted for at the peak of the housing bubble in early 2007.
Fannie Mae and Freddie Mac, the government-supported housing giants, will buy loans with down payments as low as 5% if they carry mortgage insurance. The uptick reflects insurers’ increasing confidence in the housing market and the fact that the FHA is charging higher fees, which makes private insurance more attractive for borrowers with strong credit, said Rob Schaefer, a credit executive at Fannie Mae.
Wells Fargo & Co., the nation’s largest mortgage originator, this year began allowing certain borrowers who make down payments of 5% on a primary residence to have up to 2% of the down payment come as a gift from relatives. Borrowers must have strong credit and purchase mortgage insurance.
Another sign that banks could get less picky: Credit scores for borrowers seeking conventional mortgages also are easing. Scores on purchase mortgages stood at 755 in March, down from 761 a year earlier, according to data from Ellie Mae, a mortgage-software provider. Those on purchase loans backed by the FHA dropped to 684, compared with 696 one year earlier. (Under a system devised by Fair Isaac Corp., credit scores run on a scale from 300 to 850.)
Smaller lenders are accepting even lower scores. Average credit scores on purchase loans closed through a consortium called LendingTree fell to 679 in March, down from the year-earlier 715.
Brent Kersanske purchased a two-bedroom condo in Somerville, Mass., for $465,000 last month with a 5% down payment, the largest he could afford. The 27-year-old software engineer said he applied for an FHA-backed mortgage, but his building wasn’t approved for the FHA program. Instead, Leader Bank, a community bank in Arlington, Mass., gave him one mortgage for 80% of the purchase price and arranged a second mortgage with another small bank for the remaining 15%.
“I wouldn’t have been able to get the place I wanted without this,” he said.
While smaller lenders are trying to appeal to first-time buyers, larger lenders are gradually reducing down payments for jumbo loans—those too large for government backing—to woo wealthy customers. EverBank began accepting down payments of 10.1% for jumbo borrowers with strong credit this year, down from 20%, and Wells Fargo reduced to 15% from 20% its minimum down payment for jumbos last year. Bank of America made the same change for mortgages of up to $1 million.
For now, economists and lenders say there are few signs of any return to the carelessness of the past decade’s destructive credit bubble. “Credit is loosening, but it is loosening from a tight starting point,” said Mr. Fratantoni of the MBA.
Nearly 40% of new borrowers last year had credit scores above 760, compared with just 25% before the housing bubble in 2001, according to a report from Goldman Sachs economists. “Tiny fractions of borrowers can do things that they could not a year ago,” said Lou Barnes, a mortgage banker in Boulder, Colo. And the most noticeable changes are benefiting the best-off borrowers, he said.
Lenders still are unwilling to underwrite “anything with hair on it, like if you had a credit problem, if you are earning self-reported income,” said James Dimon, chief executive of J.P. Morgan Chase & Co., on a call with investors last week. “I don’t know when that’s going to go away,” he added.
J.P. Morgan reported first-quarter earnings that included a 68% drop in mortgage lending from a year earlier. Tight lending rules are “not getting worse. It’s just sitting there and holding back [the housing market] a little bit,” Mr. Dimon said.
Any easing should give more options to first-time buyers like Nathan Davenport, 26, who purchased a one-bedroom condo for $195,000 in Atlanta this month with a 5% down payment. Mr. Davenport, who works for a phone-and-Internet services provider, says he has a high credit score but was worried that if he waited longer to save up for a larger down payment he would be priced out of the market.
“Twenty percent of this price and only being out of college a handful of years would have been really hard to pull off,” Mr. Davenport said.
Credit: Wall Street Journal
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