Millennials and other potential new homebuyers are caught in a difficult squeeze that is hindering the ability of the housing market to make a full recovery.
On one side, it is harder to qualify for a loan than it has been in years, since the Dodd-Frank legislation tightened the credit market in order to deal with the excesses that led to the housing crisis of 2007. Few people would disagree that loose credit and stretched mortgage terms let some homeowners get overextended, but more restrictive credit scores and a general return to 20% down payment requirements have left marginally qualified homebuyers on the outside and unable to take advantage of unusually low interest rates. Banks are fearful of making riskier loans, assuming they may be forced to buy them back in case of default.
On the other side, stagnant wages have made it more difficult for potential homebuyers to save up money for down payments. Generally, they can no longer finance any of the down payments and thus are delaying potential home purchases.
The Federal Housing Administration (FHA) has been looking for creative ways to rectify this problem and allow greater access to home ownership without loosening the credit floodgates and reinstating another housing bubble similar to the one that preceded the 2007-2008 collapse. FHA already offers programs for qualified homebuyers that can reduce down payment amounts to 3.5% and allow credit scores as low as 580 (or down to 500 in some cases with a 10% down payment). So far, these programs alone have not been able to sufficiently address the marginally qualified.
Quicken Loans and Freddie Mac, the organization that purchases home loans from banks and securitizes them to sell to investors, are teaming up to attempt to address this problem. They announced their initiative at the Mortgage Bankers Association annual convention in San Diego.
The partnership will be designed to allow co-developed specialized mortgage products to bring in more first-time homebuyers, assist millennials and middle-class homebuyers, and accommodate underserved populations such as minority groups. Freddie Mac's Home Possible program is a good starting template, as it already allows down payments as low as 3%.
It is not clear exactly how the programs will be modified, but the goal is to find out-of-the-box solutions instead of simply stretching credit back to dangerous levels. Creative modifications are being considered for special circumstances, such as extended families that could not qualify for mortgages separately but can pool their collective resources to purchase a shared home.
Fannie Mae, the other organization that buys and securitizes loans, announced a separate initiative at the MBA convention that is also designed to help marginally qualified homebuyers. Fannie Mae will begin accepting loans based on "trended credit data" instead of a single snapshot number in time. In other words, if your debt load is momentarily high, such as after a large credit card purchase, Fannie will consider how quickly that purchase is paid off to assess risk.
By looking at your average credit rating and how your payments fluctuate, Fannie Mae can get a better feel for the true risk of default that you pose. One wonders why this is not standard practice already — probably because of the time involved in evaluation.These efforts are at least a good start at drawing more people into the housing market, and they seem to be focused on a more reasonable evaluation of risk instead of an arbitrary stretching of credit. That is a very good sign for longer-term housing market stability.