Mortgage lending has been on the edge of two extremes for the past decade. Prior to 2007 was the world of easy money. Practically anyone could get a mortgage loan. Low doc, no-doc loans were common. Interest only, negative amortization and zero down payment loans were made every day. 500 credit score no problem, no money for a down payment, no problem.
After 2007 the mortgage industry went to the other extreme requiring 700 credit scores, 20% down payments and unreasonably low debt to income ratios making it so even the most qualified buyers were struggling to get approved.
For the past several years FHA loans have been the only avenue for buyers with less than 20% down payments. The FHA loans only require 3.5% down, but have lots of caveats. Now with the FHA raising premiums, banks are beginning their own loan programs to fill the gap. FHA is also requiring mortgage insurance premiums for the life of the loan, instead of offering the ability to drop the insurance once the LTV of the home exceeded 80%.
New Loan Programs
Notably Bank of America and Wells Fargo are offering new lending programs with an effort to reach more buyers. Traditionally first time home buyers account for around 40% of home sales. Over the last few years that number has dropped to around 28%. These new programs are hoping to capture some of that business, which has been relegated to the rental markets.
These new programs are leading the way to a more moderate avenue of lending. They offer low down payment options, which include loans only requiring 5% down. The banks are also introducing loans that have more flexible income requirements and more flexible credit guidelines. The hope is that these programs will begin to capture some of the market, which have been unable to get financing for the last several years.
Benefit to Banks
While banks have been clearing their books of bad loans for the past five years, mortgages still provide a large source of income. If these new programs provide more borrowers with financing options then it will lead to more demand and increased home sales. More home sales leads to an increase in home values. This will not only strengthen the housing market, it will also increase bank stock prices.
Increased housing values reduce losses for banks, because distressed properties are able to be sold for higher amounts, thus reducing losses. Banks will make money from both ends of this deal. They will make more money from the underwritten mortgages and have lower losses on foreclosures. That amounts to increases in profits, which increase stock prices. For banks, these new loan programs, if managed correctly will provide a win-win.
New loan programs will also help consumers, as more Americans will be able to qualify for loans and purchase homes. Home ownership is a huge economic driver for the US economy. This is an important step to the full recovery of the housing market.