State Lenders Escape Rules to Put Americans in Homes
Nick Wormald, a 29-year-old plumber with good credit, said he was shut out of the housing rebound until he asked the government for help.
Wormald, who bought a three-bedroom home in Haverhill, Massachusetts, for $215,000 in December, was required to provide a downpayment of only 3%. That's far below the standard 20% down, which he couldn't afford. And he was spared the burden of buying mortgage insurance. The plumber got the fixed-rate deal through MassHousing, his state's housing-finance agency, or HFA.
"It's good that I didn't have to exhaust all my funds," said Wormald, who had to spend about 40% of his retirement savings for the downpayment. "My family helped me out with bed sheets and things for the house. They're great people but nobody has got $10,000 kicking around to give."
Every state has one of these little-known agencies, which legislatures set up in the 1960s and 1970s to promote affordable housing. Now, as regulators tighten mortgage rules and big banks resist lending to riskier middle-income Americans, HFAs across the U.S. are rapidly expanding to restore the fading dream of homeownership. The state agencies got a boost from the Consumer Financial Protection Bureau, which exempted them from stricter mortgage regulations that it rolled out this month.
Some groups like MassHousing buy mortgages from lenders and send them to government-sponsored Fannie Mae to package into securities that the HFAs then sell to investors. The Boston-based group more than doubled its mortgage volume to an all-time high of $1.25 billion in the year ending in June, fueled by the introduction of mortgages that require no insurance.
HFAs in states including California, Idaho, Illinois, Minnesota, New Jersey, Texas and Virginia also are expanding. The Illinois Housing Development Authority funded more than 3,000 mortgages in 2013, a record, up 60% from the prior year. In California, loans with downpayment assistance increased 29% to a record 6,311 in fiscal 2013 from a year earlier.
"We believe that housing-finance agencies will be able to play a bigger role in whatever the restructured mortgage market looks like in the future," MassHousing Executive Director Tom Gleason said. "HFAs have already demonstrated that they're ready to step up to the plate to absorb the risk associated with low downpayment borrowers."
The growth in lending may also help bolster the housing recovery, which hasn't included many first-time buyers like Wormald. The homeownership rate for U.S. families earning less than the median income—about $51,000—was 48.5% in the third quarter. That compares with 53% during the peak of the housing boom in 2006, according to Census Bureau.
"First-time buyers have not been participating in the market recovery," Lawrence Yun, chief economist for the National Association of Realtors, said. "Housing finance agencies could provide a channel for these buyers."
HFAs are growing even as the White House and Congress vow to reduce the government's role in the housing market. In early 2011, according to data firm Black Knight Financial Services, the government backed about 93% of new home loans though agencies and companies including Fannie Mae and Freddie Mac, which were rescued by taxpayers. The government guaranteed about 84% in mid-2013.
The financial protection bureau's new qualified mortgage rules are designed to prevent a return of the loose lending practices that spurred the housing crash of 2008. The regulations provide a measure of legal protection to lenders that meet guidelines and expose them to legal liabilities if their loans fail certain tests, like charging high fees or requiring payments that, when combined with other debts, exceed 43% of the borrower's income. Exempt HFAs can make any type of loan without exposing themselves to liability under the CFPB's rules.
As stricter regulations make giving mortgages to some lower income borrowers more difficult, banks may increase their lending through HFAs, said Ben Olson, who helped write the CFPB guidelines before leaving the bureau in May. Olson said the loans also would help the banks meet their affordable housing obligations under the federal Community Reinvestment Act.
"One of the things being discussed is taking advantage of the exemption for housing finance agency loans," said Olson, an attorney who now represents lenders for BuckleySandler LLP in Washington.
Wells Fargo & Co., the biggest U.S. home lender, already is doing business with the state groups, spokesman Tom Goyda said. Quicken Loans Inc., the fourth largest originator last year, is looking to build relationships with HFAs, Bob Walters, vice president of Quicken's capital markets group in Detroit, said. The agencies have become far more attractive since getting the exemption, he said.
"The question is, if the industry gets really interested in this and wants to expand lending, are the HFAs ready for this influx?" Olson said.
Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax, Va., said the HFA loans may fail if home prices fall again.
"There are still enormous risks to low downpayment loans," Sanders said. "You're putting borderline borrowers into risky products again. We're going to repeat the same experiment, this time at the state level."
The state groups can expand without a jump in defaults if they maintain their focus on loan servicing, said Stephanie Moulton, an associate professor of public policy at Ohio State University. The agencies have kept defaults relatively low by screening applicants diligently, underwriting loans at affordable terms, requiring borrowers to go through homeownership counseling and contacting them as soon as they fall behind on payments, she said.
The average proportion of loans 90 or more days delinquent was 3.1% on June 30, 2012, according to a survey of 30 housing agencies in an October paper by Moulton and University of North Carolina's Roberto Quercia. That's lower than the 4.8% produced by the FHA, the mortgage insurer that permits downpayments as low as 3.5%, and the 9.2% for subprime loans. The rate was only 1.86% for prime borrowers, who tend to have higher incomes and bigger downpayments.