Mortgage in reach despite few dings
Bank of America Corp., the third-largest American mortgage lender, refused to give Paul Mataska the loan amount he needed last year after a six-month layoff from his job in 2012. That setback didn’t prevent a Canadian lender from providing the electrician the loan this year.
The American unit of Toronto-Dominion Bank approved a mortgage for Mataska through its new program with flexible income and low down payment requirements. He’s buying a $269,000, three-bedroom bungalow in Bayville, N.Y.
“I got lucky with TD — there was no primary insurance I had to pay, rates were lower and it was a lower percentage down,” Mataska, 33, said.
Borrowers like Mataska with minor imperfections on their applications, such as a brief loss of employment or a temporary drop in a credit score, have mostly been turned away by lenders since the 2008 housing crash. That’s starting to change, with at least 15 smaller firms this year offering slightly riskier mortgages, sometimes at higher interest rates or requiring larger down payments, that aren’t backed by the government. The mortgages are being held on balance sheets or sold to investment funds as the securitization market has been slow to recover.
“Some lenders became afraid of their own shadows,” said RPM Mortgage Inc. Chief Executive Officer Rob Hirt, who in August started programs for borrowers with higher debt burdens or those who had sold a home for less than the outstanding mortgage. “The market is beginning to realize that if you make smart and sound loans to people who don’t fit in the narrow box, it doesn’t make them a worse risk.”
Among those providing loans for borrowers who would otherwise struggle to find financing are Angel Oak Home Loans, Lone Star Funds’ Caliber Home Loans Inc. and Banc of California Inc. The volume of the lending is low, totaling less than 1 percent of the $1 trillion mortgage market.
Lenders including Bank of America and JPMorgan Chase & Co. have maintained high credit standards, often above the guidelines from Fannie Mae, Freddie Mac and the Federal Housing Administration. Though government-controlled Fannie Mae and Freddie Mac will buy loans to borrowers with FICO credit scores as low as 620, the average score on mortgages they purchased is about 740, well above the 660 level often considered subprime.
Established lenders are reluctant to ease their rules out of concern that Fannie Mae, Freddie Mac and FHA will force them to buy back bad loans with underwriting errors. Banks don’t want to take risks on loans that government programs won’t insure. Lenders suffered more than $200 billion of losses on home loans on their books from 2006 through 2012, according to Moody’s Analytics data, along with legal settlements and lawsuits.
That caution has led to opportunities. Shellpoint Partners LLC’s New Penn unit, the lender backed by mortgage-bond pioneer Lewis Ranieri, in August began offering mortgages for home buyers with debt-to-income ratios up to 55 percent and interest-only loans when borrowers have “high disposable income” or “high income potential due to their line of work.” Caliber said in June its new programs would offer new flexibility for foreign nationals or on purchases of condos without approval for government programs.
A Mortgage Bankers Association measure of credit availability has shown a 4.7 percent loosening this year. The gauge indicates credit is still almost 90 percent tighter than in the housing bubble that ended in 2006. A Fannie Mae lender survey released in September found 25 percent eased guidelines in the last three months for mortgages not eligible for sale to the firm or Freddie Mac, and 14 percent expected to do so in the next three months.
The TD Bank unit’s Right Step program, which was restarted in April, lets borrowers put 3 percent down and forgo mortgage insurance if they have credit scores of 660 or above.
Mataska, an electrician, said he was temporarily laid off in 2012 from a company where he has worked for eight years. With his diminished income, he said, Bank of America offered him a loan of $204,000, which wasn’t big enough. Mataska said at the time his credit score was about 740.
Terry Francisco, a spokesman for Bank of America, declined to comment on an individual borrower’s situation.
The U.S. unit gave Mataska, who is in the third year of a five-year electrical apprenticeship program, a 30-year fixed loan for $249,000 at 3.9 percent. Fannie Mae and Freddie Mac wouldn’t buy the loan because of Mataska’s debt relative to income.
“Owning a home means more permanence,” said Mataska, who has moved when his rent increased to lower his costs and stay in his son’s school district.
Banc of California provides mortgages for borrowers with a record of foreclosures, late payments or other dings on credit scores when they make a down payment of at least 20 percent and show other sources of strength, said Chief Lending Officer Jeff Seabold. The bank charges about two percentage points more for these loans than it does on its standard mortgages, he said. The Irvine, Calif.-based firm has made about $150 million of what it internally calls “second-chance” mortgages since starting the program about 14 months ago.
“To us, it’s common sense,” Seabold said. “There’s quite a few people who are boxed out that shouldn’t be.”
Samantha and Eric Sieverling, both laid off, let their condo in Lynnwood, Wash., go into foreclosure in 2012, in part because they faced a one-time building plumbing charge of about $10,000. They bought the property for $220,000 in early 2009 with prices “on the downslope but the ride kept going a lot further down,” said Eric, 49, a software engineer.
“I was devastated,” said Samantha, 49, a technology project manager. “You can’t just walk away from a home, that’s not the way it works in America.”
Samantha and Eric both found new jobs and moved into a rental in Seattle and saw their monthly payments rise to $1,900 from $1,500 over two years. Eager to avoid further increases or moving to a smaller place, they began looking to buy another home. They found a Banc of California loan officer online who was willing to work with them, even after their credit scores had fallen to the low 600s following their foreclosure.
Samantha cashed in one of her retirement accounts to make a 20 percent down payment. The bank gave the couple a mortgage at 6 percent for a 1,400-square-foot two-bedroom apartment for $185,000 that they bought in March. They can afford the mortgage and condo association payments, about $1,300, with less than one of her two monthly paychecks.