BLOG VIEW: Fannie Mae’s new HomeReady Mortgage program – the successor to its MyCommunity Mortgage program that loosens mortgage qualification requirements for low- to moderate-income borrowers – is another example of how paradoxical the federal government’s involvement in the mortgage market has become.
As government regulators are scrutinizing loan files to find even the smallest of underwriting errors – for the purpose of, in the words of Quicken Loans‘ CEO Bill Emerson, ‘pressuring large, high-profile lenders into paying nine- and 10-figure sums’ – government-sponsored enterprise (GSE) Fannie Mae has introduced a program that loosens some of the tighter lending requirements that came into effect as a result of the financial crisis for the altruistic purpose of getting more low-income/minority borrowers into homes.
Freddie Mac offers a similar program, called Home Possible Advantage, and the Federal Housing Administration (FHA) already offers loans to qualified low-income borrowers with as little down as 3.5%. All three programs are part of the government’s effort to boost homeownership among those with low- to medium-incomes. All three require borrowers to take an online course in order to qualify.
Despite this laudable goal, it seems the government is moving in opposite directions at once. On the one hand, regulators are still punishing lenders that got too loose (or sloppy, if you prefer) with their underwriting practices (which many in the industry will tell you, was a direct result of government policy, a la the Community Reinvestment Act), but at the same time, with the government’s now-deep involvement in the mortgage market, the GSEs and the FHA basically have no choice but to relax some of the stringent rules put in place if they are to free-up credit, serve the underserved, attract private capital to the mortgage marketplace and stimulate the economy.
Not only is it a dangerous tightrope walk, the regulations being put in place today could have a profound impact on where the industry is headed in the future. It’s as if the federal government has climbed partially into the driver’s seat of the giant machine that is the mortgage banking industry by taking over the GSEs and via regulation, but now that it’s behind the controls, it has come to the realization that the machine is much more difficult to steer than it initially thought. In this respect, the mortgage banking industry has become a prime example of what happens when the federal government meddles in free markets. It’s like two drivers trying to control a car on the freeway at the same time – who knows how far down the road they’ll get or where they’ll end up.
Of course, this is no great revelation to those in the industry. Mortgage professionals have been bemoaning government intervention and regulation for decades. The regulatory pendulum will continue to swing to and fro. The irony here, in my view, is that the HomeReady program comes just as numerous lenders are being sued for even the tiniest of loan defects.
So, just how much does the HomeReady program loosen the rules for low- to moderate-income borrowers? Like the MyCommunity program, which was introduced last year, buyers can put as little as 3% down – but the kicker is how debt-to-income (DTI) is calculated. With HomeReady, a lender will consider income from the borrower, as well as a spouse or cosigner, in order to determine the DTI.
What’s more, HomeReady will consider incomes from others planning to live in the home, such as parents, siblings, working children or maybe a roommate, as long as they make 30% or more of household income.
It will even consider the incomes of non-occupants, such as parents, who are willing to help pay the loan, without them being cosigners.
Fannie Mae is careful to emphasize that these loans will not be underwritten the same as the low-doc, no-doc and stated income loans that led to the financial crisis. Borrowers will still need strong credit scores, housing counseling and private mortgage insurance in order to qualify. Plus, the program will not allow balloon or interest-only mortgages.
What’s more, HomeReady loans will only be available to a narrow swath of the underserved market, as the loans can only be secured by Fannie-owned properties in designated low-income census tracts. What’s more, they are only available to borrowers whose incomes are at or below the median income (AMI) in high-minority census tracts or designated natural disaster areas.
For properties in remaining census tracts, borrowers must have an income at or below 80% of the AMI. Approximately half of census tracts will be subject to the 100% AMI limit or have no income limit.
As with the FHA’s program, borrowers will be required to complete an online education course preparing them for the home buying process and providing post-purchase support. The education course, called Framework, will be provided by the Housing Partnership Network and the Minnesota Homeownership Center and meets the requirements of the U.S. Department of Housing and Urban Development Housing Counseling Program and the National Industry Standards for Homeownership Education and Counseling.
The HomeReady program launches on Dec. 12.