Zero down-payment mortgages are politically radioactive these days.
So with banks ratcheting up demands for ever-larger down payments, you have to applaud the courage of Thomas Gleason, a long-time Bay State affordable housing champion and head of MassHousing, the state’s quasi-public housing agency, for pushing back hard in the other direction.
The MassHousing chief has rolled out a potentially controversial new mortgage initiative that could significantly increase the numbers of 100 percent loan-to-value mortgages on the state authority’s books.
Gleason and MassHousing’s new loan push is both thought- provoking and maybe even a needed antidote to increasingly skittish lenders seemingly determined to do as little mortgage lending as possible. The move comes with loan default rates rising at Fannie Mae, the troubled, federally-backed mortgage giant that is backing the new initiative.
Apples And Oranges
The housing authority’s new Affordable Advantage mortgage can open the door to a low, fixed-rate 30-year mortgage to borrowers of modest means that can scrape together $1,000 to cover closing costs.
“The real estate and lending market is marked by a series of overreactions,” Gleason said. “Four or five years ago, if you could fog a mirror, you could get a mortgage. Lenders have generally reacted too far in the other direction.”
The discrediting of all the crazy lending practices that marked the bubble years has made it fashionable to dump on no or very-low money down mortgages. I plead guilty to that.
But Gleason, in an interview last week, argued the backlash against lending abuses is now lumping in the good with the bad – and he has a point.
Attempting to compare oft-maligned subprime products to MassHousing’s latest offering is really an apples-and-oranges situation.
The only possible similarity between MassHousing’s new Affordable Advantage mortgages and the shady subprime loans of the bubble years are the waiving of down payments. That’s where the similarity ends.
MassHousing offers its borrowers a traditional product, and services and insures the loans as well, which gives it a good feel for how the mortgages are performing.
“Obviously, we read the newspapers, we read all the stories about the types of [abusive] lending that went on in years past,” Gleason said. “Generally, housing finance authorities did not participate or make those types of loans.”
And so far, the initiative is off to a brisk start.
Based on the number of Affordable Advantage mortgages it has written in the first six weeks, MassHousing could wind up making 400 of these 100 percent loan-to-value mortgages in the initiative’s first year, or as much as 18 percent of the loans it writes this year.
Meanwhile, the housing authority, even as it expands a type of mortgage lending some contend is inherently risky, also wants to drive down the number of foreclosure filings by its borrowers.
To that end, borrowers interested in taking out a 100 percent loan-to-value mortgage will have to show a credit score of 720, up from 680 previously and 140 points higher than that mandated by the Federal Housing Administration, and have no more than 41 percent debt to income ratio, Gleason notes. Homebuyer counseling is mandatory and all income, assets and employment are verified.
The tougher standards come even as MassHousing enjoys relative success keeping its mortgage borrowers out of trouble.
Overall, while default rates on MassHousing loans have risen to the 5 percent range from 3 percent a few years ago, those rates are half that seen in the overall mortgage market. The default rate on the housing authority’s 100 percent loan-to-value mortgages is higher – say around 8 percent – but it is still below that of the marketplace as a whole.
Early Success
Still, really, why go down this path at all given the political perils that lurk around this issue?
For Gleason, it’s a simple issue of finding ways to get deserving buyers of more modest means into their own homes in a region still marked by some of the nation’s highest home prices.
While home sales plunged last month, prices for single-family homes rose 3.28 percent in July, to a median price of $315,000, according to The Warren Group, publisher of Banker & Tradesman.
Banks meanwhile, are upping their requirements, asking for 10 percent to 20 percent down – or up to $60,000 on a $300,000 home.
The average MassHousing borrower over the past year shelled out roughly $215,000 for a house or condo, with an average annual income slightly more than $68,000.
Gleason’s trump card may be in the detailed stats MassHousing keeps on the performance of the tens of thousands of mortgages it has written over the years.
Of the 10,400 loans for which Mass Housing provides private mortgage insurance, 455 were 90 days or more past due on their payments, including 88 with 100 percent loan-to-value mortgages. Of those in that last category, however, only four had credit scores of 720 and above.
Or to put it another way, Mass Housing paid mortgage insurance claims on 100 homes and condos that went into foreclosure last year. But not one had the credit scores required under the new Affordable Advantage program.
“Based on past performance, we believe these loans will perform better than the 100 percent loans in the past performed, Gleason said. “You can make legitimate loans to people with low down payments if you do it with care.”
