Out-of-the Box Approach Helps Lenders and Their Qualified Borrowers
By Karen Nielsen | February 25, 2016
Experts say loan products allowing lenders to consider income from multi-generational households will be the trend in 2016 in helping to address affordability hurdles from rising interest rates, housing prices and rents in many parts of the country.
“There’s an increasingly high bar for some homebuyers getting into the housing market,” says Daren Blomquist, vice president at RealtyTrac. “We are seeing a trend in loans that try to address that high bar and offer help for some homeowners.”
Fannie Mae’s HomeReady™ is one such program. HomeReady allows income from non-borrower household members to be considered in determining an applicable debt-to-income ratio for the loan. The program helps multigenerational and extended households qualify for an affordable mortgage and allows for a down payment as low as 3 percent. (Read more about HomeReady in this FM Commentary.)
Working and Living Together
It’s the notion that it takes a village to buy a home. Often called co-sharing or co-buying, the practice is becoming popular not only with new immigrants, but also with generations of families, and Millennials, Blomquist says.
A RealtyTrac study shows shared buyer purchases in November 2015 accounted for 14.4 percent of all residential property sales, compared to 3.5 percent in October 2014. Leading the co-sharing pack is Flushing, NY, with a whopping 38.4 percent of shared buyer sales. Downtown Flushing is the largest urban center in Queens, and home to the second-largest Chinatown in New York City.
The 2010 census put the population of Flushing at 72,000, with a breakdown of 69.2 percent Asian, 14.9 percent Hispanic, 9.5 percent white and 4.2 percent African-American. A 2013 Department of City Planning report looking at new immigration patterns found that about two-thirds of Flushing’s population was foreign-born, according to an article in The New York Times.
“There’s a very big melting pot (in Flushing) and we can see there’s a lot of cultural willingness to share costs,” Blomquist says.
Recognizing Cultural Differences
Rounding out the top five co-sharing cities are: San Jose, CA, with 35.5 percent; Oakland, CA, 31.8 percent; Seattle, 29 percent; and San Francisco, 27.8 percent.
Three of the top-five cities are in California where growing home prices have eroded affordability, which has declined approximately 25 percent in the state since 2011, according to Fitch Ratings.
Anthony Alfano, who runs The Alfano Group, a real estate agency in Sacramento, CA, wrote in a blog post that “lending will be healthy in 2016, invigorated from a diverse new set of mortgage loans introduced into the market that will grant access to new homebuyers. As many Americans can now afford the monthly payment for a home, but can’t scrape together the sizable 20 percent down payment traditionally needed to buy, there will be an array of purchase loans with less money down.”
Alfano expects single-family home sales in the Sacramento area to increase by about 6 or 7 percent this year, and the median home sale price to rise by 7 to 10 percent.
Patty Arvielo, president of New American Funding, a national mortgage banker in Tustin, CA, says her current focus is marketing to the large Hispanic Millennial population, or “Hispennials,” who represent the largest first-time homebuyer segment in America.
“I’m very excited to see products that offer borrowers who have traditionally been left on the sidelines an opportunity to purchase a home in a very sustainable way,” she says. “I am also excited because for once I think the agencies are seeing that there is a need to consider cultural differences within our country and realize that there may be differences in the way people save and spend. These differences can be underwritten to provide clarity around credit worthiness.”
A January Housing Wire article says Fitch Ratings posits that an increase in interest rates will force lenders to further open the credit box, especially because the refinance volume is likely to “dry up” in a rising rate environment.
“It always makes me nervous when I start hearing that (about opening the credit box),” Blomquist says. “Opening the credit box was the solution around 10 years ago when affordability was becoming an issue. It didn’t turn out so well and opened up a Pandora’s box.”
But things are different this time around, he says.
“Fannie Mae is certainly not loosening the debt-to-income ratio for the income documentation, but thinking outside the box when it comes to how we qualify people and allow more people to be involved in the pursuit of a home,” Blomquist says.
United Wholesale Mortgage, one of the country’s largest conventional wholesale mortgage lenders, became one of the first to offer HomeReady, which launched on December 12.
In a news release, President and CEO Mat Ishbia describes the program as an innovative lending option that will help qualified borrowers with lower and moderate incomes obtain a mortgage that is more affordable and sustainable.
Finding affordable, quality housing to own remains a priority for about seven out of 10 non-homeowners, with 43 percent of non-owners saying homeownership is a fairly to very high priority, according to a 2015 Housing Matters Survey conducted by Hart Research Associates and commissioned by the MacArthur Foundation. Millennials and African-Americans prioritize homeownership at even higher rates of 53 percent and 46 percent.
“Millennials put a higher value on network and friends, so the cost of homeownership is something they’re more willing to share with friends than other generations,” Blomquist says. “If, as expected, affordability continues to become a bigger problem, the adoption of these types of loan products will catch on.”
Karen Nielsen is a freelance business writer in Dallas.