Mortgage credit has loosened, but mainly for wealthier borrowers, despite government and industry initiatives to expand access to loans for the broader population.
Credit availability for buyers of larger or more expensive homes priced above the parameters for Fannie Mae, Freddie Mac and Ginnie Mae programs has loosened since 2009, according to the Mortgage Bankers Association. But credit access for smaller loans to buy lower-priced homes hasn't been expanding as much.
"Most of the action in terms of loosening has been on the jumbo side," said Michael Fratantoni, the MBA's chief economist and senior vice president of research and industry technology, during an Urban Institute Housing Finance Policy Center webcast this year.
Weaker appreciation at the low end of the housing market, combined with higher costs to originate mortgages tied to new regulatory compliance obligations, such as the Dodd-Frank Act's ability-to-repay rule, make low-end mortgages less attractive for lenders.
"The balance is smaller and they tend to pay off sooner," said Teresa Blake, practice manager at Wipro Gallagher Solutions and a former mortgage operations executive at Bank of America.
The profit margin on a small-balance mortgage varies by lender and geographic market, said Brian Koss, executive vice president at nonbank lender Mortgage Network, which makes jumbo loans in high-priced markets like Boston, but also does very small loans in low-priced markets like rural Maine.
"I think a reason you would have a loosening on the upper end and not the lower end would be ability-to-repay compliance," Koss said. "When you get down to the lower-balance loan, these people are struggling to make qualifications. You're at risk of putting somebody out of the house. It's really not about the profit."
Monthly purchase-loans applications generally peaked in mid- to late-2012 when they were up as much as 100% for loans north of $729,000, but they largely declined thereafter. They did pick up a little last year, when requests for loans in the midprice $317,000 to $417,000 range did best, but even these loan apps were up less than 20%.
"The purchase market has been a bit of dismal story for 2014," said Lynn Fisher, vice president of research and economics at the MBA, at the group's recent mortgage servicing conference. Purchase applications have been recovering, but gains for the smallest loan sizes remain smaller than those for larger loans, she said.
Low-end homes at an annualized appreciation rate of 9.6% began appreciating faster than high-end homes at 7.7% in the last three months of 2014, according to a January report by Zillow senior economist Krishna Rao. However, over the longer term the appreciation rate has been more favorable for top-tier homes. These have recovered almost 54% of their value lost during the last housing downturn, while the lowest tier has recovered 44%, Zillow found.
Lenders that are more confident in their compliance regimen have an easier time making smaller loans, Koss said.
"I don't think compliance has to be as unforgiving as it has become, but to keep the program healthy I think you have to have the compliance," said Koss, noting that he has found recent easing in government programs helpful.
"Just having that FHA change was huge for us," he said, referring to the Federal Housing Administration's recent move to lower mortgage insurance premiums.
Fannie Mae and Freddie Mac's decisions to allow 3% down payment lending also have been helpful in terms of creating a ripple effect that promotes other low down payment programs in the private market to consumers, Koss said.
"It's letting [consumers] know down payment is not the issue on repayment; it's the ability to cover your cost that matters," he said.
Some depository lenders now willing to make small mortgages aren't necessarily originating through the compliance-heavy government programs that encouraged the activity in the first place, added Blake.
"Maybe in 2009 and 2010, they would have turned those folks away," she said. "We'd all love to see more affordable housing out there. In the $120,000 to $150,000 range, we see a lot of transactions, but it's not nearly where we'd like it to be."
Small and mid-sized banks with room on their balance sheets are holding these loans in portfolio because it's a faster and easier option than selling the loans in the secondary market. Upfront, the mortgage may not be as profitable as larger loans, but bank lenders pursue the business as a way to build customer relationships and cross-sell additional financial products.
"I was surprised to see lenders come out with their own products at the 97% loan-to-value ratio level that go to much smaller loan amounts," said Blake.
"It's because of the extra steps that have to be done, say, with an FHA loan. People say originating an FHA loan is like originating a house. Cycle time matters," she said, noting an FHA loan can take as long as 45 to 60 days to originate, while a portfolio loan may take only 30.
Banks have some requirements for affordable lending due to the Community Reinvestment Act, but they generally still far prefer jumbo loans to higher-income individuals as more attractive from a cross-selling perspective, said Koss, whose company sells loans to banks.
"If done correctly, the pull-through is fine" on affordable FHA loans, said Koss. "The hardest part is just getting involved early with the customer and getting them ready to own a home."