The New Era of ‘Maybe’ Mortgage Lending
WHY YOU SHOULD CARE
Maybe all of us — banks and buyers alike — have learned something from the financial crisis.
Eric Margules assumed it would be a breeze. As an owner of a real estate company and already a condo owner in a nice New York City neighborhood, he figured he would have no problem getting a loan from a bank. But last year, he says, he found himself struggling to find a new mortgage for a family home on Long Island. There would be tons of paperwork, lots of questions and some doubts.
But his loan wasn’t rejected — or accepted. The bank loaned him just half the purchase price.
Thinking of buying a home? Before the financial crisis six years ago, banks were telling most people yes to a home loan, then pretty much no in the immediate years after. Today you can expect a big, fat maybe if you are pursuing the American dream of homeownership. Call it a natural progression — a banking world that, in lending, has gone from being foolhardy to way too strict to something much hazier now.
For Margules, the process was far from fun: In fact, he says, “It was hell.” But it turns out that banks aren’t the only players embracing a new lending culture. Homebuyers have gotten surprisingly conservative in a way that could be just as important. Here’s what the latest numbers say. According to Home Mortgage Disclosure Act data, the number of mortgages that banks are approving now is about half of what it was 10 years ago. Has the improved economy changed any of this? Apparently not. There were fewer mortgage applications in 2013 than in 2009, according to data from the Urban Institute. And forget about slipping through the cracks and getting a home loan if you are not financially capable: The average required credit score for a loan is now about 50 points higher than it was before the crisis.
Homeownership Around the World
South Korea: Rising rents spurred the government to loosen mortgage restrictions and cut interest rates this past August, causing loan applications to triple that month.
Russia: Taking out a mortgage was considered risky even before the ruble’s current decline. Now, mainly lower-income buyers will be paying double to triple the principal borrowed on 15- to 20-year loans granted before the crisis.
U.K.: Lenders such as HSBC are offering historically low interest rates on home loans, though the housing market there looks to be cooling in 2015.
India: Sparked by a new and more stable government, the number of mortgages in India is on the rise. But low- and middle-income buyers aren’t riding the wave, due to rising costs for in-demand city-center apartments.
Germany: Less than half of Germans own a home — and that’s not likely to change even as lower mortgage rates entice some to consider homeownership. For starters, interest on mortgage loans isn’t tax deductible, and regulations are more favorable to renters there.
Obviously, new laws passed after the financial crisis to more tightly regulate the industry have made banks pickier — a lot pickier — about home lending. Indeed, some consumer advocates now say banks are going too far, denying loans to people with good jobs and solid backgrounds. The change in credit-score requirements may not seem like much, but it means “millions of borrowers who would have qualified for credit before the boom would likely not qualify today,” says Barry Zigas, director of housing policy at the Consumer Federation of America, an advocacy group in the District of Columbia.
As Margules discovered — and as his mortgage banker, Julie Teitel, a senior loan officer at Everbank, describes — the process can be quite an ordeal. Lenders typically now require two years’ worth of W2 tax forms, two years of tax returns validated by the IRS (a new requirement that can add weeks to the process) as well as a month of pay stubs and the property’s tax bill, mortgage statements and insurance bills, not to mention numerous forms that need signatures. A renter trying to buy a house also needs a year’s worth of canceled rent checks. Because Margules is in real estate, his income doesn’t show up on standard W2 tax forms — something many banks find too complicated to deal with.
There’s also a new category of lending. Instead of saying no outright, some banks are offering loans that are less generous. Even certain new flavors of mortgages are based on strong credit. Bank of America, for one, has a delayed-financing option, through which it loans money to a homebuyer who pays cash for a home within 90 days.
Is any of this going to change? Most experts do believe that banks are going to get looser with lending over time; some are already becoming more lenient with some jumbo mortgages on higher-end homes. But interestingly, the homebuyer, without any prodding from banks or government, is apparently getting more conservative. Remember our hunger for those adjustable rate mortgages, with percentages that were superlow but could also rise sharply? Today, fixed rates rule the day: Most homeowners under Bank of America Home Loans choose traditional 30-year, fixed-rate mortgages — even when the rates are higher on those loans compared with adjustable rate mortgages.
“They’re more comfortable with the 30-year,” says Jennifer Wodarck, a Los Angeles-based regional sales executive and senior vice president for Bank of America Home Loans.