The housing market may have seen the worst and finally on its way to recovery after more than two years of slump.
Recent developments in the mortgage market indicate improving lending standards, which have been tougher since 2008. Bigger loans are being made available to more borrowers by private lenders and the federal government boosting the huge mortgage market. A lower credit score and lower down payment -for as low as 5% in some cases- are now letting potential homeowners to be qualified for a loan. Those actions if materialized would let more borrowers have access to mortgages which is necessary for housing sector to recover.
According to Chip Cumings, president of Northwind Financial, when these moves become visible, it will be easier to predict what will be next.
Jumbo mortgages – any loan of more than $417,000 in average market – made up of 22% of the mortgage market, before 2007, down to 6% today. According to CoreLogic, private lenders are getting up into the jumbo mortgages with an improvement of 3% from January to May of this year. Compared to last year, Wells Fargo almost doubled its jumbo lending to $3.7 billion in the second quarter of this year and Chase rose 16% for the same period and will keep on growing.
Keith Gumbinger, a vice president at HSH Associates, jumbo mortgages suggests greater risk for the lender, but, the banks are willing to take the risk on the better borrowers. If there are low foreclosures, private lenders are likely to extend jumbo borrowings to a larger group in the years to come. Smaller local lenders are also into jumbo lending now, said Cummings.
For high quality borrowers, more options are available. A mortgage backed by a Fannie or Freddie can go up to $729,750, but private lenders can offer higher when they keep the debt on their books. This is an advantage for someone house-hunting in expensive cities like New York, Boston or Washington which in turn will help those housing markets. Interest rates on privately backed jumbo mortgages are about 1% higher than those backed by the government.
During mortgage meltdown, even those qualified for mortgage could not pay a hefty down payment which is commonly 20% or more. But over the last year, that limit has decreased, making more people capable of paying even with less cash.
No-money-down days are still far from reach. But there is a substantial decrease from 34% down payment made the year before down to 28% of the purchase price on the average as of May this year, according to CoreLogic. And the drop will continue with more 10%-down loans becoming available, according to Scott Stern, CEO of Lenders One.
Credit score requirement remain high but seem to be moving slightly down. In May, the average borrower’s credit score is 757, eight points lower than the year before. But borrowers with scores in the mid to high 600s can qualify for a mortgage nowadays unlike a year ago, according to Stern.
However small these changes may be, it still indicates that mortgage lenders are now ready to take on more risk and test the boundaries. And as the lending mode is switched on, more applicants could qualify – an indication that the housing market is on the right track.
