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Harney: Buyers can reap home-loan deals

By Kenneth Harney
Published: June 11, 2018, 6:04am

Could lenders’ pain be your gain if you’re shopping for a home mortgage? Maybe.

Though it hasn’t been in the headlines, mortgage companies are having a challenging year. Not only have total originations of new loans declined as the refinance market shrinks because of rising interest rates, but many lenders could be staring at red ink and staff layoffs, as well. Michael Fratantoni, chief economist for the Mortgage Bankers Association, the industry’s largest trade group, says the “typical” lender in the U.S. may “not be profitable” when the books are closed on the first quarter of 2018. Inside Mortgage Finance, a trade publication, reports originations “tanked” during the first three months of 2018, hitting their lowest level in three years.

Possibly as a result, competition for new home-purchase loan applications is on the upswing. One bellwether: LendingTree, the popular online marketplace where banks and mortgage companies compete for borrowers’ business, tells me that shoppers for home loans are receiving significantly more offers on average through its lender network compared with a year ago. “It’s getting very competitive,” said LendingTree chief economist Tendayi Kapfidze, and “lenders are expanding their credit box” to pull in more borrowers. Some may not even be fully passing along recent rate increases, he added.

Another indicator: Lenders appear to be offering slightly more attractive deals. The Mortgage Bankers Association’s mortgage credit availability index — which monitors credit-score requirements, down payments and other key underwriting terms at major lenders — improved by 1.9 percent for conventional (nongovernment) mortgages in April. This suggests posted mortgage terms were slightly more favorable to consumers than they had been previously.

Still another sign: The latest quarterly Default Risk Index, compiled by credit bureau TransUnion and credit score developer VantageScore Solutions and released last week, found that while lenders in the auto-loan, student-loan and bank credit-card sectors are tightening up on terms to applicants, mortgage lenders appear to be easing. Lenders seeking higher loan production are willing to take on slightly more risk.

So how does this translate for you in practical terms as a homebuyer thinking about applying for a mortgage this summer? More competition among lenders is always good for consumers, so you should definitely be shopping among multiple lenders and getting competing offers.

But don’t expect mortgage companies or banks to give away the store. The easing underway is modest, the capital market cost of money is broadly the same for most lenders, and the mortgages they close generally have to be acceptable under “ability to repay” and other standard federal rules adopted after the financial crisis. The easing more likely will be felt at the margins of the market — first-time purchasers and borrowers whose debt levels or lack of down-payment cash made them tough to approve in the past, as well as applicants for “jumbo” loan ($453,100 and up) with cream-puff credit.

Here’s what you might find currently:

• More flexibility on debt-to-income ratios. Investors Fannie Mae and Freddie Mac are allowing lenders to say yes to credit-worthy buyers with DTIs as high as 50 percent — up from the previous 45 percent limit. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says the flexibility “really helps” in qualifying buyers with high-debt burdens because of student loans, medical bills, alimony payments and similar burdens. FHA is allowing DTIs of 56 percent-plus.

• Heavier use of 3-percent-down loans through Fannie Mae and Freddie Mac programs aimed at qualifying more buyers with moderate incomes. Gene Mundt, regional manager for American Portfolio Mortgage Corp. south of Chicago, says first-time buyers who qualify on income and credit scores “are the real winners” this summer. Plus Freddie Mac is rolling out a new “HomeOne” program solely for first-time purchasers — 3 percent down, no income limits — in July.

• Greater availability of “non-QM” (non-qualified mortgage) loans for borrowers who don’t fit into the usual underwriting boxes — especially the millions of self-employed individuals whose income patterns are sporadic, depending heavily or solely on sales, commissions and bonuses. Non-QM loans, which must comply with federal “ability to repay” rules for borrower and lender safety, come with higher interest rates compared with standard loans, but the “spread” — the difference in rates — between them is narrowing, according to non-QM lender Angel Oak Companies Senior Vice President Tom Hutchens.

Bottom line: Shop aggressively or miss out on the opportunities for better deals.