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New lending guidelines target first-time homebuyers

WASHINGTON – Dec. 16, 2014 – Years after the bursting of the housing bubble, many consumers – particularly young borrowers and those who suffered a major financial setback during the Great Recession – have found it is difficult to qualify for a mortgage.

People who experienced a temporary job loss or a bad credit event, such as foreclosure or a car repossession, face an uphill battle getting a home loan approved in light of the higher downpayment and higher credit requirements put in place by the banking industry to avoid a repeat of the reckless lending that fueled the 2008 housing market crisis.

But the tighter lending standards have been a drag on the nation’s housing market recovery, and mortgage giants Fannie Mae and Freddie Mac were set to institute new lending guidelines, effective Saturday.

“In America, we survive on housing. It represents such a large portion of the gross domestic product that we can’t get back on track until we find a method to get millennials – that group of 25- to 35-year-old first-time homebuyers – back in the housing game,” said Michael Sichenzia, owner of Blue Ocean Solutions, a Parkland, Fla.-based consulting firm for the housing and construction industry.

“The first-time homebuyer is the kindling for the housing market for the midlevel buyer to move up,” he said. “The midlevel buyer can’t move up unless they sell to first-time homebuyers. What happened is the pendulum swung so far to the right, making it harder for first-timers to get in.”

The new standards will allow mortgage lenders to be more flexible with borrowers who have blemishes on their credit for one-time events, such as a job loss or a medical bill. It will also reduce the minimum credit score requirements.

Typically banks will not approve a mortgage for a borrower with a credit score below 660, but they will have the discretion to lend down to 620 under the new guidelines.

Fannie Mae and Freddie Mac previously required downpayments of at least 5 percent, but now will back loans with a 3 percent downpayment and permit borrowers who refinance to reduce their equity to 3 percent to cover closing costs.

Fannie Mae and Freddie Mac do not make loans directly to borrowers. The government-sponsored entities provide liquidity by buying mortgages from lenders, packaging them as securities, guaranteeing them against default and selling to investors in the secondary market. Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion.

Paul Kaboth, vice president of community development at the Federal Reserve Bank of Cleveland, which covers Western Pennsylvania, said the lower downpayment requirements will be the key to opening the door to a larger pool of buyers.

“Saving 20 percent, which is the standard for the industry, is really challenging for low-income people,” he said. “The day-to-day expenses they have consume the larger portion of their income.”

He said mortgage lenders will be willing to make more loans with lower downpayments because Fannie and Freddie will either purchase or insure those mortgages. “This change should, in the longer term, reinvigorate low-income neighborhoods,” Mr. Kaboth said, “because there will be more sales and refinances in those neighborhoods.”

Housing industry professionals are generally upbeat about the new standards. But, according to an Associated Press report this week, Senate Republicans have begun to voice some concern that the loosening of requirements could be a step back toward the abuses that led to the mortgage meltdown.

“Housing must be stimulated, and this is another step in that direction,” Mr. Sichenzia said. “It’s yet to be seen if it will work or not. Time will tell.”

The homeownership rate for young people has been falling, according to Washington, D.C.-based National Association of Realtors. In 2008, 41 percent of purchases were made by first-time homebuyers. In October this year, the percentage had fallen to 29 percent.

“Young people will be the biggest beneficiaries of the lower lending standards,” said Lawrence Yun, chief economist at the National Association of Realtors. “With this new change, we should see a faster recovery in housing and with it a faster growth in the economy.”

Kevin Laird, manager of secondary markets for Howard Hanna Mortgage Services in O’Hara, said the industry is hoping to see a trickle-up effect from the loosened standards. As moderate- and low-income buyers purchase homes, the sellers should be able to buy higher-end properties.

“We are excited to see what the conditions of financing will be,” Mr. Laird said. “We hope it will open a new tier of buyers in the real estate market.”

Copyright © 2014 Pittsburgh Post-Gazette, Tim Grant. Distributed by Tribune Content Agency, LLC.