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.
"Right now we can tell a story and stand by it that says HFA loans perform better than the same loan made through a non-HFA lender with the same demographic profile," MassHousing's Gleason said. "The challenge is how to maintain quality as we get bigger."
Wormald, the plumber, makes about $80,000 a year, $4,000 more than the average income of MassHousing borrowers. His credit score of 720 is below the average of 741. In rare cases the agency makes loans to people with scores below 660, the industry standard for subprime mortgages.
MassHousing's mortgages are backed by Fannie Mae, which raised its minimum downpayment to 5% in November. Fannie Mae guarantees 3% down mortgages from the state agencies because of their low default rate.
MassHousing and other HFAs also benefit from Fannie Mae's risk-sharing program, which allows them to avoid requiring mortgage insurance. The program, which Fannie Mae limited to less than a total of $3 billion in mortgages last year, saves borrowers hundreds of dollars in monthly payments.
Agencies that participate in the program—including those in Colorado, Idaho, Minnesota, Rhode Island, Virginia, Wisconsin and Wyoming—must repurchase loans that become delinquent within the first year. Gleason said MassHousing has only had to buy back one loan.
The Illinois HFA goes further than MassHousing, providing borrowers up to $10,000 in downpayment and closing cost assistance. Borrowers bring as little as $1,000 to table. The group's average credit score is 695.
"Obviously somebody with a lower score is deemed to be more risky," Mary R. Kenney, the executive director of the Illinois group, said. "With the right loan product and proper underwriting and education for the borrower, that risk can be managed."
The Idaho HFA, which didn't pull back from first-time buyers during the housing bust, completed a record $727.9 million of mortgages in fiscal 2013, up 53% from a year earlier. The Idaho group gave about 80% of loans to first-time buyers, said Gerald M. Hunter, the agency president.
"They can benefit from a lot of the services we offer, and lacking that support, many of those people are not going to become homeowners," Hunter said.
HFAs supply only a small fraction of mortgages today. They have funded 3 million mortgages since the early 1970s through the sale of tax-exempt revenue bonds—and more recently—mortgage-backed securities, according to an analysis by associate professor Moulton. After peaking at 126,611 loans in 2007, volumes fell to 41,857 in 2009 before rising to 87,848 in 2012, the most recent data available from the National Council of State Housing Agencies.
"These laboratories will get bigger and there's a potential here to innovate and find a responsible path to homeownership," said Christopher Mayer, real estate professor at Columbia Business School in New York. "Over time, others will learn and develop best practices."
Gleason said HFAs across the country are talking about creating a national mortgage product that would be more attractive to large lenders, which tend to shy away from niche state offerings. A national product would also allow for bonds with more geographic diversity and better hedging of credit risk, he said.
Wormald considers his home, a fixer-upper built in 1910, his most valuable asset. He recently finished a five-year plumbing apprenticeship and hasn't been able to save much money.
"I'm working my way up to having more money," Wormald said. "I want to get ahead in life. This loan gave me the chance I needed."