May 6th, 2015 7:10 AM by Jackie A. Graves, President
U.S. consumers are finding it
easier to get a mortgage, after years of near frozen credit following the
financial crisis. This, in turn, is giving way to more creative loan products,
as well as more unusual ways of using existing loan products.
The heat behind the credit thaw
is simple clarification. After the crash of the subprime mortgage market,
lenders were hit with billions of dollars in lawsuits and loan buybacks by
Fannie Mae, Freddie Mac and the federal government. Afraid of having to buy
back future loans, even pristine ones, lenders shut the door to anyone without
virtually pristine credit. That is finally changing.
"Now that we know more of
the rules than we did in the past, you're seeing credit widening to a wider
spectrum," said Greg Gwizdz, executive vice president at Wells Fargo
Bank of America branch
in New York.
New rules from the Consumer
Financial Protection Bureau and the Federal Housing Finance Agency, conservator
of Fannie Mae and Freddie Mac, have
recently clarified which loans will be safe from repurchase risk.
"We have listened closely
to your concerns about the impact that loan repurchases have had on your businesses,
and we understand that addressing these concerns in ways that are mutually
satisfactory to you and the enterprises is critical to ensuring that there is
liquidity in the housing finance market and to providing access to credit for
borrowers," FHFA Director Mel Watt told lenders last fall at the Mortgage
Bankers Association's annual convention.
home sales rose 1.1% in March
Lenders must now verify a
borrower's ability to repay a loan, something that might sound intuitive but
which was basically nonexistent during the heady days of the housing boom. They
also have to verify income and assets.
Now that the rules are clearer,
lenders are getting more creative. Wells Fargo, for
instance, is offering its jumbo loan borrowers (mortgages for more than
$417,000) a new way to lower their monthly payments. This is because they hold
these loans on their books, rather than selling them to Fannie Mae or Freddie
"If you pay down your
mortgage at Wells Fargo, in an amount of $50,000 or more, we re-amortize the
loan and lower your monthly payment," said Gwizdz.
In the past, and commonly in
the industry, if a borrower paid down the balance of the loan, the term would
shorten, but the monthly payment wouldn't. This is particularly popular among
high net worth borrowers.
mortgage applications drop 2.3% as homebuyers stall
"You have people in those
income ranges who receive bonuses and sometimes they choose to put their bonus
toward their mortgage," he added.
Another option is in the home
equity loan space. Jacksonville, Florida-based EverBank is promoting its home equity line of
credit as a means to buy a home. While this has always been possible, it is not
something borrowers usually do. Instead they use these loans, which pull equity
out of a home the borrower already owns, for home improvement projects or to
pay for their children's education. Now they're using them to buy second homes.
In an especially competitive
market, however, where cash is king, having the home equity line to actually
buy the home can give the buyer an advantage. Much like a regular mortgage,
EverBank offers the loan based on the value of the home, but instead of a fixed
amount, it's an open end line of credit. It gives the borrower the opportunity
to take future draws of cash. Again, this product is best suited to the more
"It takes a little bit of
the pressure off the sales transaction, if you have that available cash to
close upfront. For many people it's all about getting the home," said Tom
Wind, executive vice president of home lending at EverBank.
For borrowers who want cash
from their homes without debt, a new loan option recently introduced by San
Diego-based EquityKey allows borrowers to sell the future price appreciation of
their homes, for cash. For example, if you buy a house for $500,000, and you
expect the value to increase by another $300,000 before you sell it, you can
sell a percentage of that appreciation to EquityKey.
rate lowest in 25 years
"We refer to it as a real
estate participation agreement, because the key difference between debt and
equity is while we will participate in the upside, we have no absolute right of
getting paid back the initial principle investment," said Jeff Nash,
co-founder of EquityKey. "If home prices go lower, we reduce the amount we
are owed, until we are owed nothing."
That money can be used for
anything, even a down payment on a second home. Once the home is sold, EquityKey
gets 75 percent of the change in that market's home values, as measured by the
S&P Case Shiller home price index.
John Norris, 70, closed on an
agreement with EquityKey last week, selling the future appreciation of the La
Jolla, California, home he's owned for 20 years. He's going to use the cash to
fund a new business and thought it was a better deal than a reverse mortgage,
which is designed to give older borrowers cash from their homes.
"It's very expensive to do
a reverse mortgage, with the upfront fees, points and so forth. With EquityKey,
there isn't any."
Some of these may sound riskier
than the traditional 30-year fixed mortgage, still used by the vast majority of
today's borrowers, but the fact that they are coming into the market today is a
sign of more creativity in lending yet to come.
"I wouldn't try every
crazy, new idea that comes along, but I certainly wouldn't rule them out,
because some place in there I think you're going to see is some ideas that are
very good," said David Blitzer,of S&P Dow Jones Indices, a partner in
the S&P Case Shiller home price indexes.
Blitzer said the EquityKey
product could be especially helpful to young, first-time buyers who are having
a hard time becoming home owners.
"Their prospects in the
future may be wonderful, but their cold cash on the spot is not wonderful, so
if you can do things like let them monetize in advance some of the future value
of the house, that's big plus," he said.
By Diana Olick — CNBC real
estate producer Stephanie Dhue contributed to this report.
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