What Does Affordable Housing Mean?By Rob Chrisman,
Rob Chrisman's Perspectives
Residential lenders have a wide variety of products to offer products. That is true despite the feeling that loan officers have of, “All we have is Fannie, Freddie, FHA, and VA.” There are jumbo, non-QM, small business, reverse mortgages – and a handful of others. And even within Fannie and Freddie there are programs that lenders have available that many loan officers don’t know about. In an otherwise slow-growth industry, most, if not all, lenders will need to dig deeper into the growing pool of minority households and potential first-time homebuyers to achieve growth.
One such group of programs focuses on offering more loans to first-time homebuyers and underserved markets. Under this generic umbrella, which includes some very profitable loan types, are down payment assistance programs, first-time home buyer programs, loans for certain segments of the population, loan programs with guidelines that incorporate varied factors, and special price breaks.
All of these can help borrowers in markets where home price appreciation has outpaced wage growth for several years. And although mortgage rates have been steady for much of the summer of 2018, they are higher than in 2016 and 2017. Families are grappling with property and casualty insurance costs. Of course, they cannot not have health care, and this is crowding out other spending – such as housing. Weak income growth among low- and moderate-income households has also contributed to affordability pressures.
Should this type of lending even be a conversation topic on a nationwide basis? Dr. Matt Lind with The STRATMOR Group points to a recent study. “The Housing Affordability Index (HAI), published monthly by the National Association of Realtors, gives a value of 100 to a family with the median income who has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment and a qualifying ratio of 25 percent. (For example, a composite HAI of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home.) From 2015 to June 2018, the index has declined by roughly 20%.
A Harvard study this year observes that, “While still relatively affordable in the nation as a whole, homeownership in some metros remains far out of reach for the typical household. In the high-cost Los Angeles market, for example, a household with the area median income would be able to afford the monthly mortgage payments on only 11 percent of recently sold homes. By contrast, even a low income (bottom-quartile) household in Pittsburgh would be able to afford 26 percent of recently sold homes. Such dramatic differences in affordability contribute to large disparities in homeownership across metro areas. Of the nation’s 50 largest metros, Pittsburgh has the highest homeownership rate of 70 percent, while Los Angeles has the lowest rate of 48 percent.”
Lenders should be aware that the affordable products are not necessarily those exemplified by a handful of specialty lenders who are focusing on nontraditional mortgages. Angel Oak Mortgage has developed a reputation for lending to borrowers who have had a life event, so they lost their house, or had to file bankruptcy, but they’ve now got their feet back on the ground and they’re ready to buy their next house. Several lenders offer interest-only mortgages, and even loans with limited income documentation such as bank statement loans. These mortgages are dubbed “non-QM” because they don’t meet Fannie Mae’s and Freddie Mac’s plain-vanilla “qualified mortgage” rules.
Smaller lenders should be aware of what larger lenders are offering. Wells Fargo, for example, offers an “Advancing Homeownership℠ strategy” for both retail and correspondent channels to make homeownership more accessible. “By offering a full suite of affordable products (including Fannie Mae Home Ready, Freddie Mac Home Possible, FHA and our own yourFirstSM Mortgage in Retail, we can provide the right financing option for customers who need flexibility.”
Wells Fargo also focuses on the relationships it builds with Realtors, builders, non-profits, trade/member organizations and advocacy groups, as well as the GSEs, FHA/VA and Rural Development. “Possibly the most important part of making homeownership more accessible though, is education. Understanding options can be daunting and dispelling myths is a challenging roadblock. That’s why we provide education on affordable lending to our own team members, our lending partners and to borrowers in multiple ways, including free workshops and webinars, our Neighborhood LIFT program, and in-depth product, program, and industry training on a variety of topics.”
Large independent non-depository lenders have a different approach. For example, on all affordable home programs United Wholesale currently covers the appraisal up to $525 if the loan closes. This is above what Fannie and Freddie offer.
Builders have a role as well. Modest-sized homes are considerably more affordable for first-time
and middle-market buyers. But the critical question, however, is whether the homebuilding industry can supply, and local regulations allow, enough new housing to meet the need for homes affordable to a broad range of households. Shortage of construction workers since 2008 crash. And recent developments in immigration are not helping.
The topic of down payments, and programs that assist with those, is a common at conferences. Even if they can secure a mortgage, renters must also be able to afford the down payment and closing costs. The Survey of Consumer Finances shows that the median net worth of renters was just $5,000 in 2016, about the same in real terms as in both 1995 and 2007. On top of that, studies show that fewer than one in three renters had more than $10,000 in financial assets, and only 21 percent had more than $25,000. As a result, only a small share would be able to cover even a 3.5 percent down payment and 2 percent closing costs on a median priced
home, which amounted to $13,596 in 2016.
As lenders can see, “affordable home programs” encompass a variety of touch points for borrowers: education, loan programs, fee reduction, down payment assistance programs, and the type of homes builders are encouraged to build all factor into it. In an environment of shrinking margins and shrinking volumes, every lender, regardless of size, should be using the tools at their disposable to help a wider range of borrowers.