Do you remember how easy it used to be to get a loan a decade ago? It was actually ridiculous how simple it was. Nowadays things are MUCH more stringent, yet at times it seems like we are gradually starting to head back to some more risky and creative loan products. It’s sort of like the frog and kettle, but with financing.
Financing Moves Value: There are many reasons why home values go up or down in real estate, and financing happens to be one of the bigger layers in the market to make value move. This means when financing begins to change, we can ask why it changed, and also consider any future impact on values. A decade ago there were many options to finance 100% of a purchase, but those options disappeared from the scene for a few years. Yet as prices have skyrocketed in recent years, lenders have begun to equip buyers with more products to “afford” the higher market without putting any “skin in the game” so to speak (By the way, 29% of all sales last month in Sacramento County were FHA). There is certainly a time and place for diverse loan products, but new products can also help values continue to rise when it might be okay for values to cool.
I asked a group of loan officers what more risky products they are beginning to see or hear about coming back into existence. Here is what they said:
Adrian Petersen – Loan Officer: It’s been a very interesting roller coaster ride in the lending world over the past decade. Some of the old products are beginning to surface again. Specifically the Fannie Mae My Community 97% for first time home buyers (no ownership in last 3 years) which only requires 3% down payment and can be gifted from family or employer. Also, the 85% Jumbo with no MI has also just re-entered the market. Although we have some very exciting products out there, it’s a good time to remember where we just came from…
Sandy Donaldson – Loan Officer / Branch Manager: There are not a lot of risky products on the market per se due to many of the recent regulations. However, we have seen the conforming 3% down loan reappear. This is a conforming 30 year fixed rate product that requires only 3% down and that 3% can be gifted from a relative. We have also seen conforming loosen their standards on gift funds. It used to be that buyers needed 5% of their own money but now the entire down payment can be gifted on a standard conventional loan. We have seen FHA MIP premium go down substantially and mortgage insurance factors for conventional loans have also declined.
Matt Gougé – Loan Officer: Not only have I seen the increased advertising of ‘Stated Income’ loans in my social media news feed, but I have also heard discussions among some industry folks that there are Venture Capitalists pooling BILLIONS of dollars with the intention of buying up these alternative mortgage products. While these loans do carry extra risk and don’t have the same terms as conventional financing, there is a subsection of the market that will be well served by these products. In my humble opinion the area where people really get into trouble is when they start using loan products that adjust (either the rate or the fact that a certain term is ‘interest only’- or both) and/or have balloon payments. Signing up for a mortgage payment you can afford today that can increase 50%+ in 5 years is a recipe for disaster.
Brad Yzermans – Mortgage Loan Originator: I think the reemergence of homebuyer assistance programs that require $0 out of pocket and allow a person to borrow up to 105% of the home’s value, along with higher qualifying income limits, is helping sustain home values and keep home ownership more affordable. Many people would consider these programs to be risky…..but they work! In fact, 75% of all my buyers are eligible for one of the many different home buyer assistance programs we offer.
Dara Delgado – Loan Officer / Mortgage Broker: In the last year, there have been several “niche” or non-QM loan products that have rolled out, that I have originated and closed. 1) 2 years seasoning from foreclosure, short sale, bankruptcies –allows a max up to 55% Loan-To-Value. 2) Self-employed borrowers allowed alternative documents (12 month bank statements) – adding all deposits, then dividing by 12 months = qualifying income –allows a max up to 65% Loan-To-Value. 3) Asset Depletion loans (using substantial assets, to qualify, opposed to income). I have also seen various private money lenders roll out more aggressive product such as: Stated income for self-employed or wage earner borrowers – allowing a maximum of 75% Loan-To-Value. Private money lenders loan terms and costs, however are much higher than traditional or niche product loans.
People of Sacramento: By the way, I was featured in a series called “People of Sacramento Commenting on the News“. Nathaniel Miller of the Sacramento Bee is the brains behind this effort. Read more here. Photo: Kevin Fiscus.
Questions: What risky products do you hope won’t make it back? Any other insight or stories to share?
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Thanks for detailing the loans. I had heard the loan standards had eased but some of those examples are riskier than I expected.
Recent foreclosure but huge down payment seems fine to me but 105% of home’s value – yikes! – that sets off alarm bells for me.
It’ll be interesting to see how financing evolves over the next year or two. This is an important layer of the market to watch. It tells us quite a bit. Thanks John.
Thank you for the great article Ryan. Great job getting so many experts to comment on the same question. I found it very interesting that each loan officer had something different to say.
Thanks Gary. I agree. I also thought it was interesting to hear about some of the different programs. Watching the way financing is moving gives us keen insight into what the market is doing.
Home run with this article. Well done!
Thanks so much Mike.
You bring up a good point about these loan products helping to move prices up. In my opinion it can be a dangerous cycle if not checked. Since buyers don’t have much “skin in the game” as you state, we could get into another situation that we were just in. Appraisers are unique because they are on the front lines and will be able to see this before a lot of others. Let’s hope people will listen if things start getting out of hand.
Thanks Tom. I’m glad you mentioned that. Appraisers do have a unique perspective. It’s easy to target appraisers when escrows are not going right, but there is some insight there to glean. What is the market doing? We tend to be able to get a good balanced answer when we ask a multiplicity of real estate professionals. I recommend asking that question to an appraiser, real estate agent, loan officer, and title company to see what they say.