The Massachusetts Housing Partnership (MHP) is revamping its first-time home buyer program in the hopes of attracting more lenders to offer its subsidized loans.
MHP first launched its existing SoftSecond program in 1990. Aimed at low- to moderate-income first-time homebuyers, the program offers low, fixed-rate down payment loans which are split into two parts: a conventional mortgage that covers 77 percent of the purchase price and a SoftSecond mortgage, which covers 20 percent, and which is generally subsidized by MHP to keep the rate low. Borrowers have to contribute the remaining 3 percent themselves as a down payment, although gifts from family and friends may be used for part of the funds.
While the primary loan conformed to Fannie Mae guidelines, the SoftSecond mortgage did not, and therefore would have to remain on portfolios. Over time, as the secondary mortgage market grew and interests rates decreased, the program became less appealing to lenders, who preferred to sell more of their loans onto the secondary market rather than keep them in their portfolio. Approximately 40 Massachusetts lenders participated in the program in the early 2000s, while 25 banks do so today, said MHP spokesman Rus Lodi.
With its new loan product, the One Mortgage Program, “we’re trying to do something that was much more reflective of the current state of bank regulation, but doing it in a way that from a borrower’s perspective, was identical, or as close to identical as we could make it,” in terms of interest rates and payments, said Clark Ziegler, executive director of the MHP.
The One Mortgage program does away with the second loan entirely, with the whole mortgage underwritten as a single fixed-rate loan and any subsidies a borrower may be eligible for applied to the interest rate. This will allow it to be sold onto the secondary market and securitized, should banks choose to do so. The program will also allow for speedier online underwriting.
So far, bankers appear cautiously optimistic about the new package. Robert Davis, senior vice president and chief credit officer at Cambridge Trust Co., which offers SoftSecond loans, said he hadn’t yet reviewed the specific terms of the One Mortgage but the possibility of being able to sell the loans was intriguing.
“The regulations have been in such a state of flux that there are a lot of question marks about [selling onto the secondary market],” Davis said. “But it seems to me like this would simplify things and if we could sell them on I don’t think that’s a bad thing … We would find that interesting.”
Bob Driscoll, senior vice president of residential lending at Blue Hills Bank, said, “We like the product a lot. We actually like One better than SoftSecond, in some ways – it integrates a little bit easier into our regular underwriting process, in terms of taking in loan applications. We’re looking forward to One.”
Obstacles remain, however. MHP first began the process of revamping the program several years ago, working with the Massachusetts Bankers Association and Fannie Mae to come up with underwriting guidelines. But implementing the change has proved difficult, as a tsunami of new, post-housing crash state and federal regulations have made banks wary of any but the most plain vanilla loan offering.
New Rules
In particular, the Consumer Financial Protection Bureau’s new “ability to repay” rules – which allow a borrower to sue a bank if he or she alleges the bank should have known they could not afford a mortgage – have pushed banks to make sure all their loans fit within certain narrow parameters that reduce their liability.
“The challenge now is that in the currently regulatory environment, having a lot of second mortgages in your portfolio, let alone interest-only second mortgages, is much more of a potential issue for the banks than it was 20 years ago,” said Ziegler.
A new tweak to the CFPB rules, announced just last week, may help turn the tide in One Mortgage’s favor. The regulator singled out MHP by name as an example of an organization whose tightly-underwritten loans they were exempting from the new ability-to-repay rules. That means that banks who issue the MHP loans wouldn’t have to worry about an additional legal liability from them, though they’re non-traditional.
“Part of what they’re saying is that the programs like ours, there’s built-in discipline and quality control. This is a public mission, to help borrowers and make sure that they’re successful. So to put banks through the wringer when that’s already hardwired into what we do, doesn’t make sense,” said Zeigler.
“One of the things [MHP] does well is the education of the borrower,” said John Brodrick, senior vice president of mortgage lending at Eastern Bank. Brodrick said he’d reviewed One Mortgage and that Eastern was planning to offer it as soon as it’s available.
MHP plans to phase out the SoftSecond mortgage entirely by the end of the year.
Email: csullivan@thewarrengroup.com
