The effectiveness of the Biden administration's efforts to attract more low- to middle-income borrowers depends in part on the ability of municipal lenders to procure loan products that the state secondary market buys and securitizes for this purpose. However, some lenders in the community are finding that red tape and related spending are hurdles to financing affordable housing, sometimes forcing smaller players to limit themselves to working with aggregators and their options for secondary market sales, related revenues and the Reduce the number of LMI loans they can make.
"Increasing the cost of borrowing ultimately hurts the borrower," said Marc Shenkman, president and co-founder of Priority Financial Network.
While these lenders may not always work directly with agencies like Fannie Mae or Freddie, they are the primary sources of the business-critical credit that ends up being aggregated for sale to the two government sponsored companies and potentially helping the primary and secondary markets gain a foothold into an untapped $ 300 billion market of potential low- to middle-income consumers.
"It can be really difficult to talk to a large company about affordable housing goals," said Tai Christensen, Diversity, Equity and Inclusion Officer at CBC Mortgage Agency, the administrator of a Chenoa Fund to support down payments, low income and minority groups supports lending. "Community lenders or local branches are often the ones who really know the needs of their neighborhood."
Although the neighboring state market still has more extensive criteria for low-income borrowers than the state-sponsored borrowers in some cases, some local and regional lenders rely more on Fannie and Freddie's programs to help their clients whenever possible, given the cost hurdles facing mortgage companies operate and borrowers on the former market.
"We like the new approach that GSE's Federal Home Finance Agency has taken to accessing credit," said Scott Olson, executive director of the Community Home Lenders Association. “I think at Ginnie Mae we are very concerned about the proposed net worth changes that are still there, especially the new risk-based capital proposal. We see with such things that the inevitable result is to oust or oust smaller players. "
As for fees, the FHFA has considered the option to reduce the risk-based fees Fannie and Freddie have charged on some loans since the Great Recession, and possibly return to more even pricing. Some municipal lenders, especially those focused solely on affordable housing, like the idea of getting rid of these fees, which effectively act as a deterrent to lending to LMI borrowers.
“Lenders don't want to be disadvantaged, especially if we're doing more to serve lower-income borrowers. They have lower ratings that will affect the profile of the loans we provide. We don't want to be punished for that, ”said Mark Vanderlinden, Chief Lending Officer and Secondary Markets Manager at Homewise Inc., a community development financial institution in Santa Fe, N.M.
With margins shrinking, community lenders may be increasingly concerned that they may have to bill their clients more to maintain their own financial soundness, especially if they are among those who need to meet the counterparty requirements to deal directly with the GSEs for sale.
However, the loans bought by the GSEs are still more affordable for low-income borrowers than the loans available in the private market, where non-qualifying mortgages for consumers with non-traditional incomes extend eligibility but tend to have higher interest rates. Without them, the LMI market could be difficult to develop.
“Non-QM loans are not cheap. They won't add affordable housing, ”Shenkman said.
He believes that government-led, affordable loan expansion that focuses on unlimited home ownership could go too far at some point.
“They tried to make a home for everyone in the United States when they were & # 39; 05 & # 39; 06 & # 39; 07. How did that work? "Shenkman said, referring to a time when exceptionally loose underwriting led to a property crash and put taxpayers at risk by forcing the GSEs into government.
However, according to data compiled for an index published by the Urban Institute's Housing Policy Finance Center, loan performance and terms were in better shape than they were then. The Inspector General of the Federal Housing Finance Agency has determined that the cost of the deferral will be largely manageable as the 50 basis point negative market fee for refinancing covers nearly 70% of the projected cost. Right now, community lenders are generally thinking more about how to make more credit and make profits than managing credit risk.
But the QM change made under the previous government, the implementation of which has been delayed by the current one, is causing some concern within municipal lending. It has a lot of support from broader trade groups and larger players, but specific underwriting criteria for determining QM status have been replaced by the extent to which a loan is above the average base quotation rate for similar products, pointed out Olson of Community Home Lenders Association. The GSEs had a temporary QM exception, but this will be abolished. Smaller lenders have fewer resources to manage credit risk than larger ones.
"QM and other things have been pretty responsible so I don't see ourselves foaming like we did in the last cycle, but we don't support the latest change," said Olson. “Basically the way it's set up now, it no longer measures a safe loan and whether a person can afford the loan. It measures whether you can find an investor who will buy it at a certain price. "
While the GSEs and the Federal Housing Finance Agency have taken several steps to expand options for LMI homeowners and renters – through lending measures like suspending restrictions previously added to their preferred stock purchase agreements, adding underwriting based on rental history for first-time mortgages for home buyers and lower down payment barriers for 2-4-unit properties, community lenders and affordable housing advocates believe more could be done.
Community lenders could give more mortgages on condominiums that sell for less than traditional houses if they had extra leeway and less red tape from the GSEs, Shenkman said.
It may take some time to see how some of the underwriting expansion so far will affect underserved LMI condominiums or rentals, but one secondary market development that immediately improved the overall financial condition of the community institutions and borrowers involved was the PSPA -Change, said Sadie Gurley, vice president at Maxwell Capital, a fintech provider of due diligence services.
"When they lifted the restrictions on investor homes and second homes that caused everyone to hike prices immediately, I still think there is still room because people are a little hesitant about what the next suggestion will be," said Gurley. “That helped them a lot, because there were many second homes and investment properties that were well above current interest rates and were not refinanced.