Credit Thaws as Housing Recovery Picks Up Steam

By Daniel Duffield

As the real estate market enters into the critical spring season, credit requirements for home purchase loans is beginning to relax, with lenders being more willing to approve mortgages with low down payments and Fannie Mae purchase more of such loans on the secondary market.

Such activity constitutes a large sentiment shift from the past four years, during which a 20% down payment was to be expected for most purchase transactions.

According to John Forlines, chief credit officer for Fannie Mae’s single family business, lenders have generally been more open to working in such conditions than in the past; while requirements have not seen any drastic shift, other mortgage parties are assuming the risk, allowing lenders and mortgage insurance companies to provide more flexible home loans.

Fannie Mae has recently been willing to purchase loans with down payments as small as 3%, however these mortgages require that borrowers pay private mortgage insurance. During the market bottom at the lowest point in the housing crash, such private mortgage insurance was hard to come by.

At the time, the sole loan option for borrowers with minimal funds for a down payment was the FHA loan, insured by the Federal Housing Administration (FHA). As a result, the FHA garnered a large portion of the market, exceeding its original purpose. While this may have temporarily provided support for the market, the FHA assumed substantial losses in the process.

In the face of this $16 billion shortfall, the FHA has now opted to raise mortgage insurance premiums and mandate PMI for the lifetime of the loan for all mortgages secured after April 1, making FHA loans increasingly less affordable.

At the same time, with the housing market making significant improvements this year, private mortgage insurers are beginning to relinquish their expensive overlays on mortgages with higher loan-to-value (LTV) ratios, making conventional loans somewhat cheaper than FHA mortgages.

Craig Strent, CEO of Apex Home Loans in Bethesda, Maryland, noted this trend, stating that FHA loans are indeed growing more expensive while more and more low down payment borrowers enter the mortgage market to seek loans from the private market rather than the government.

In the U.S. Senate, a bipartisan effort is in progress to reduce the market stake of the FHA and reduce the advantages of this product over those offered by private mortgage insurers. However, despite the advantages presented by FHA loans, the FHA’s share of the market has already been diminishing as Fannie Mae gains a greater hold on the market. With mortgage rates rising and less borrowers applying for refinance loans, lenders are allowing borrowers to make smaller down payments to increase their business.

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