Fast and Furious

Anyone following MassHousing's homeownership activities might have noticed that new, innovative home financing options have been coming out of the Agency with the speed of the high performance muscle cars in the now cult classic "The Fast and the Furious." In case you missed any announcements, here's a refresher.

No-MI Mortgage, January 15, 2012: This 30-year fixed-rate mortgage, for both purchases and refis, can be used to finance up to 97% of the purchase price or home value, at a low interest rate with no points, no mortgage insurance premiums and low closing costs. With a dramatically better payment for qualified borrowers than an FHA mortgage, our No-MI loan has taken off. MassHousing is registering and closing loans at four times the rate it did prior to January 15. This product will enable us to eclipse $500 million in mortgage production for our fiscal year (ending June 30), and puts us on track to originate $1 billion in home loans for the 2012 calendar year.

Single-Premium MI, May 1, 2012: Our low-cost single premium mortgage insurance option allows interested third parties to provide downpayment and closing cost assistance to homebuyers by prepaying the mortgage insurance with a single premium. The premium is earned by MassHousing over a five-year term, and the unearned portion of that premium is now refundable to the third party or borrower. This eliminates the financial penalty associated with similarly priced "non-refundable" single premium MI plans. MassHousing MI still provides borrower payment protection in the event of job loss.

Refinance Program for MassHousing Borrowers, May 15, 2012: This program can provide lower, fixed interest rates for homeowners with MassHousing loans who want to refinance, regardless of their property's value. This is an especially compelling for MassHousing borrowers who feel locked into a higher rate because they are upside down on their mortgage, even though they have a job, income, good credit and the ability to pay.

RightRate for Lower-Income Borrowers, May 23, 2012: MassHousing made all of its products even better by offering a discounted interest rate for borrowers who earn 80% or less of the local area median income. The discount, which equates to roughly 0.25%, is available for both purchases and refinances. On a $250,000 mortgage, the savings is about $600 a year.

There are still more new products and services on the drawing boards at MassHousing, which we hope to roll out in the weeks and months ahead. Stay current with MassHousing by following us on Facebook, Twitter and LinkedIn, or by visiting masshousing.com. And if you are a homebuyer or homeowner, be sure to ask your lender what new MassHousing products might be right for you. They are coming fast and furious.

A nod to homebuyer counseling

Knowledge is power, especially when it comes to an investment and responsibility as large and complex as homeownership. A recent study by the U.S. Department of Housing and Urban Development shows just how powerful knowledge can be.

The Pre-Purchase Counseling Outcome Study followed 573 individuals enrolled in HUD-funded counseling. Among other things, the study found that 35 percent of these attendees went on to purchase a home in the 18 months that followed, and only one of these purchasers had fallen more than 30 days behind on their mortgage payments.

In addition, the study found that the purchasers tended to have higher incomes, better credit scores and more in savings than non-purchasers. About two-thirds of purchasers were deemed "mortgage-ready" by the counseling agencies.

We've long believed in the power of homebuyer education, and require it on many of our loans for first-time buyers. A good course will help potential buyers determine whether they’re ready to buy a home; if they’re not, it will show them what they need to do to get ready. It will debate the pros and cons of homeownership; inform homebuyers about credit; instruct them on finding a safe, responsible loan; and discuss the steps in the homebuying process.

Buying a home is a huge commitment, so being informed and responsible about homeownership is essential. Quality homebuyer counseling helps buyers understand all that goes into purchasing a home, and forces them to make an honest assessment of their readiness of owning a home.

Read the HUD report. Or, contact a MassHousing-approved homebuyer counseling agency near you.

Clearing up a misconception: Why MassHousing loans are not subprime

Here at MassHousing our loans to homebuyers sometimes can raise an eyebrow or two.

First there’s the fact that we makes loans to homebuyers and homeowners with modest incomes. Then there are our low downpayments (as low as 3%). Most recently we drew some attention for offering a loan that allows a 3% downpayment but does not require the borrower to pay mortgage insurance.

To some people this sounds risky; they are tempted to brand us as a “subprime lender.” Post-2008, there’s really no stronger accusation in the home mortgage industry. Add to that the fact that we are a public entity—albeit one that does not use taxpayer dollars—and skeptics wonder if we’re not being irresponsible and embracing a discredited form of lending that started all the trouble.

This is an understandable concern and one that deserves a thoughtful response. That’s what today’s blog post is about.

Defining Subprime

Given how frequently the term “subprime” is used, it is surprising that there is no formal definition for the word. A Wall Street Journal blog post from March of 2011 commented on this and we recommend you look it over. That post also refers to the FDIC, which way back in 2001 published what it believed were some tell-tale signs of subprime loans.   

While there is no textbook definition for a subprime loan, our review does show that there is some consensus around a few major characteristics. Let’s look at them one-by-one and compare them with some key MassHousing guidelines.

MassHousing vs. Subprime

One thing that appears clear is that any borrower who obtains a subprime loan probably has “damaged” credit. The FDIC suggests that credit scores below 660 warrant a subprime loan; other sources consider credit scores of 620 or lower to be subprime territory. MassHousing’s average credit score is about 740 with a minimum score for most of our programs at 680, which cannot be considered damaged credit by any stretch.

Another generally agreed-upon characteristic of a subprime loan is a higher-than-normal interest rate. This is to compensate for the higher risk taken by the lender in making a loan to someone with a lower credit score and a history of missing payments. MassHousing‘s interest rates are typically at or below market.

A third nearly universal attribute of a subprime loan is a borrower’s high debt-to-income ratio, typically 50% or more (i.e., the borrower spends 50% or more of their income on outstanding loans and credit card debt, for example). Here again, a MassHousing loan is far more conservative: our maximum total debt-to-income ratio on a 3% downpayment loan is 41%.

Another hallmark of subprime loans is the documentation—or sometimes lack thereof— required to qualify. Many subprime lenders offer no-income and/or no-asset verification loans, or loans with stated and unverified income. MassHousing verifies and documents all income, employment and assets.

Subprime mortgages often have variable terms, with adjustable interest rates, payments that increase over time and the potential for negative amortization. In contrast MassHousing loans are “plain vanilla,” 30-year, fixed-rate mortgages with no increases in the principal and interest payments over the life of the loan.

The absence of mortgage insurance most assuredly does not constitute a characteristic of subprime loans. It’s worth noting that one of the leading affordable housing programs in Massachusetts, the Soft Second Mortgage, has touted increased affordability created by the elimination of mortgage insurance. They even have a “piggy-back” mortgage which some also mistakenly classify as a subprime characteristic. The Soft Second has long been touted as a safe and affordable product for low- and moderate-income homebuyers.

Income and Downpayments

It is worth noting a couple of other things that do not turn up in a review of various definitions of subprime loans: low downpayments and low-income borrowers. This will come as a surprise to some casual observers, who assume that a low-downpayment loan to a person of modest means is a recipe for failure.

That is not to say that downpayments and a borrower’s income aren’t relevant. However, our experience has shown that a low downpayment is not a sure sign that the borrower will get into trouble. Nor is the presence of a 20% downpayment or equity a guarantee that a loan is not subprime. You might be surprised to learn that low-downpayment lending (i.e., loans where the borrower puts down less than 20%) goes back to 1957 when a private mortgage insurance company called MGIC introduced mortgage insurance and opened the door to homeownership for millions of Americans.

When it comes to income, what matters most is not how much the borrower earns but whether or not the loan they take out can be repaid with that income. Lower-income people are no less reliable than those with bigger paychecks when it comes to making mortgage payments, as long as their housing payment is a reasonable percentage of their income.

More important than the size of the downpayment or a borrower’s income is their credit history and debt-to-income ratio. At MassHousing we underwrite loans to make sure that the homeowner can afford the payments for the long term. Many MassHousing borrowers have strong credit histories and a stellar record of making their payments on time, even though they could afford to make a downpayment of just 3% (keep in mind a 3% downpayment on a $250,000 home is still $7,500). You may be surprised, as we were, that many subprime loans originated after 2000 ignored all other risk factors as long as a borrower had 20% downpayment or equity.

Delinquencies and Foreclosures

Finally, for anyone who still might be skeptical, let’s look at delinquency (late payments) and foreclosures. Surely just about everyone would agree that when the housing bubble burst, most loans that might qualify as “subprime” became seriously delinquent and many went into foreclosure. In fact that is true, and today according to the Mortgage Bankers of America, the delinquency rate for subprime loans in Massachusetts is over 20%. Even Massachusetts loans insured by the Federal Housing Administration (FHA) have a delinquency rate over 11%. In contrast, as of April 30, 2012 just 3.5% of the low-downpayment loans insured by MassHousing’s Mortgage Insurance Fund were delinquent while our foreclosure rate was just 2.0%.

Bad Loans and the Bubble Burst

Consumers are right to be outraged at the irresponsible lending (and in some cases irresponsible borrowing) that went on before the bubble burst. The biggest culprits, however, were not low downpayments or all loans sold to Fannie Mae or Freddie Mac, for instance. Instead they were loans that defied common sense, such as mortgages that did not require income or employment verification; negative amortization and adjustable-rate loans with extremely low teaser rates and dramatic rate increases after the teaser rate expired. MassHousing did not make these types of loans and never will.

Since 2008, it has become tempting to oversimplify the mortgage problem, to categorize anything other than a 30-year, fixed-rate loan with a 20% downpayment as subprime. Unfortunately it’s not that easy, and frankly, if those were the only loans available the housing market would be even more depressed than it is today. A 20% downpayment on a $250,000 home – which is about the median price of a home in Massachusetts today – would be $50,000. Even a 10% downpayment would be $25,000.

Good Loans and Good Lending

There are no shortcuts when it comes to responsible mortgage lending. There is no single cookie-cutter approach that guarantees success. Each borrower is different and the responsibility falls squarely on the lender to analyze each borrower’s credit, income, employment and debt burden to determine what they can afford over the life of the loan.

MassHousing’s track record proves that low-downpayment lending to people with modest incomes can be successful. By any measure these are not subprime loans. In fact these days, with their strong record of repayment and low foreclosure rates, MassHousing’s loans are just the kind that most conventional lenders would be pleased to have on their books.

The types of loans that we make may not be considered mainstream, but then again ours is not a mainstream mission. MassHousing’s mandate is to find innovative ways to help people with modest incomes buy a home, especially in times when they are not adequately served by the conventional market. The year 2012 definitely qualifies as one of those times.

Fee changes make mortgage choice clear

The FHA has raised its mortgage insurance premiums. As this Washington Post article indicates, it was out of necessity.

It's one more reason to consider a no-mortgage insurance loan from an approved MassHousing lender. Only state housing finance agencies like MassHousing can offer a loan these days with a downpayment requirement of as little as 3% and no mortgage insurance.

There are still plenty of reasons some buyers will use an FHA-insured loan, but the trend generally in conventional mortgage lending is toward higher costs.

It reminds me of a sign I once saw in a print shop that read "Speed, Quality, Price…pick two out of three." It meant (perhaps obviously) that you could have a job done quickly at low cost, but that you would likely sacrifice quality in the process. Or that you could get high-quality at a lower price but you would have to wait longer. You get the idea.

When it comes to home mortgage loans, the sign today might read "Easy Credit, Low Downpayment, Low Fees…pick two out of the three."

Even with its recent fee changes, the FHA may still be the easiest credit guarantee available for low- downpayment loans, but the cost is likely to rise dramatically.

If the meltdown in the mortgage market has taught us anything it's that you can't be all things to all people. Even with the federal government behind them the FHA can't offer the elusive combination of easy credit, low downpayment, and low costs.

MassHousing has long been a provider of safe, affordable mortgage products to homebuyers with modest incomes. We built our products around low downpayments, and reasonable costs. We chose not to go down the road of substandard credit offset by higher borrowing costs. We view that approach as being inappropriate for our borrowers and contrary to our ultimate goal of safe, sustainable homeownership.

As a result, our delinquencies and foreclosures are a fraction of those seen at other high loan-to-value (i.e., low downpayment) lenders and mortgage guarantors. We continue to offer safe, affordable mortgage products that require low downpayments and feature comparatively low interest rates and insurance costs.

Ask your local lender if they are MassHousing-approved and if they offer our new "No-MI" loan that requires just a 3% downpayment.

The Rent Vs. Buy Question

Before 2008, homeownership was an integral part of the American dream. Then home values began to drop, foreclosures rose and credit markets seized up, making renting an apartment more appealing than owing a home. Once again, though, things may be starting to turn. A number of media outlets have reported recently on the rent versus buy question, so it's a good time to look at the pros and cons of both styles of living.

On Renting
Renting an apartment does not have nearly the same hold on the popular imagination as owning a home, but it has always had its advantages, many of which were magnified after the housing bubble burst. Renting offers greater flexibility; you are typically bound only by a one-year lease, and you can usually sublease your unit should you wish to move sooner. There is less financial risk as well; a renter must typically go out-of-pocket only for first and last-month's rent, a security deposit and perhaps a finder's or realtor's fee. Contrast that with the tens of thousands of dollars usually required for a downpayment on a home or condo. And of course, as a renter, you are not responsible for any maintenance costs.

On Buying
MassHousing has said on a number of occasions that it's a great time to buy your first home in Massachusetts. And that's as true today as it's ever been. Home prices have fallen to their most affordable level in years and interest rates remain at or near historic lows. If you're a qualified homebuyer, affordable loans are available. Add to this the fact that rents are on the rise while apartment vacancies are down, and conditions would seem to favor buying.

Along with the current market conditions, there are several other benefits to homeownership. Mortgage interest and property taxes are tax deductible. You have an opportunity to build equity in the property. You can decorate and change things to suit your tastes. And there is often a sense of fulfillment that comes with owning a home and putting down roots.

No matter how you choose…
In truth, because of the nature and number of considerations, there may be no right or wrong answer in the rent versus own debate.

The fact that there is a debate at all, though, highlights the dearth of affordable rental housing both in Massachusetts and across the country. The Center for Housing Policy's 2012 Housing Landscape reported that nearly a quarter of working households nationwide (24% in Massachusetts) spend more than half of their income on housing costs, and that rents increased even though the household income of renters fell. Housing costs declined for homeowners, though less than the drop in household income. According to the National Low Income Housing Coalition, a family in Massachusetts would have to work 110 hours at the minimum wage—or earn $21.96 an hour—to afford a two-bedroom apartment at the fair market rent.

At MassHousing, we are continually working to create more housing and to make what housing there is more affordable. Last year, we set a record for rental housing lending, providing $445.5 million to create and preserve 4,057 units at 31 developments across Massachusetts. This in addition to the nearly $300 million we provided to homebuyers and homeowners.

Whether you want to rent or own, you can stay informed about rental housing that we are creating and preserving and also about our affordable home mortgage loans by following us on Twitter, liking us on Facebook and watching our videos on YouTube.

Another Great Feature of MassHousing Mortgage Loans

Loan Level Price Adjustments (LLPAs) are changes (up or down) to the price an investor pays when purchasing a loan from a lender. And these LLPAs can have an adverse effect on the borrower.

For example, say an adjustment of minus 0.75% is made to the price for a loan on a condominium. The lender, in turn, may then raise the mortgage rate to the borrower in order to justify the reduced price from the investor.

Here's the good news: MassHousing's residential mortgage programs do not have LLPAs. We price our mortgages at the highest possible level so our approved lenders can provide the most competitive rates to the public.

 LLPAs can be an impediment to affordable homeownership, since they potentially increase the cost to the borrower. If you'd like to learn more about our affordable first and second mortgage products, contact me or other members of MassHousing's Home Ownership Business Development team.

The Real Estate and Mortgage Markets are Looking "Up"

You may be hearing the word "up" a lot more in the months ahead when it comes to the real estate and mortgage markets, and it's about time.

A total of 2,350 single-family homes sold in Massachusetts last month, the highest sales volume for the month of February in five years, according to a recent report by The Warren Group, publisher of Banker & Tradesman. February home sales were "Up" 33 percent statewide—an increase from 1,765 sales in February 2011.

According to our field staff, enrollment is "Up" at the homebuyer education courses sponsored by non-profit counseling agencies, and many of April's scheduled courses are completely filled "Up".

While the Case-Shiller Index of home values was down slightly for the Boston MSA in January, Boston's "seasonally adjusted" index for January was actually "Up". Many Realtors are reporting that open house attendance is "Up" and the number of offers submitted on homes for sale is also "Up". We are hearing that in some communities where sales activity is "Up", Realtors are seeing home prices going "Up".

We saw interest rates tick "Up" recently, which could mean your time is "Up" if you've been waiting for rates to go any lower.

Apartment rents are also going "Up", making it more attractive to buy.

We've seen reports from the Department of Labor that the number of people who are employed is going "Up" as is personal income. For those who say they have given "Up" on buying a home because it is difficult to get approved for a mortgage, know this: MassHousing is offering mortgages with only a 3% downpayment at near record low interest rates, with no mortgage insurance.

Yes, things are beginning to look "Up" and with all of these positive indications, there may never be a better time to refinance or purchase a home.

MassHousing's No-MI Mortgage Off to Quick Start

Reservations for MassHousing mortgages have tripled compared to previous weeks. The surge in demand is being fueled by our No-MI Mortgage, which was rolled out January 23.

In the first three weeks of 2012, MassHousing reserved 126 first mortgages valued at $28 million. Since that time—i.e., since we've made available the No-MI loan—we've reserved 663 loans for $161.4 million.

All MassHousing Mortgages offer competitive interest rates, require low downpayments, have no hidden fees and are serviced locally by the Agency. Unlike a traditional MassHousing mortgage, borrowers making downpayments of less than 20% of the purchase price are not required to have mortgage insurance, though they do pay a higher interest rate. The savings and the expanded buying power are substantial. Compared to an FHA loan, a family purchasing a $200,000 home with a $7,000 downpayment would save $125 per month and $45,000 over the life of the loan.

No-MI MassHousing mortgages can be used to purchase or refinance a home. To date, most of the loans have fallen into the latter category. This is particularly beneficial to homeowners whose homes have lost value and had been hesitant to refinance because they didn't want to pay mortgage insurance, or because the added expense of MI negated the savings they would have realized from a lower interest rate.

In addition to the No-MI mortgage, MassHousing continues to offer a mortgage with MIPlus, a unique mortgage insurance that helps you repay your loan should you lose you job. Borrowers do pay a monthly premium for MIPlus protection and the payment may be higher than the No-MI loan, but the interest rate is 0.375% lower. For some, the traditional MassHousing loan is still a preference. One in five of our borrowers still select our MassHousing loan with MIPlus.

Learn more about MassHousing's No-MI Loan.

Cambridge Property Becomes State's First 40T

Chapman Arms in Cambridge recently became the first property in Massachusetts to be preserved under Chapter 40T of the Massachusetts General Laws.

Formerly known as Craigie Apartments, Chapman Arms is a 50-unit property located near Harvard Square in Cambridge. Originally built in 1879, Chapman Arms was reconfigured to its current configuration in 1986 and was long in the MassHousing rental housing portfolio.

The law, which was passed in 2009, gives the state the right of first refusal to buy an affordable property before it is sold into the market. Rather than allow the Chapman Arms to convert to market rents, the Department of Housing and Community Development designated Homeowners Rehab, Inc. to take over as developer, keep the property affordable and make necessary improvements.

It's certainly not the cure for a rental housing market that's seeing rising rents and increased demand, but preserving 50 units in a high-demand section of Cambridge is certainly a nice place to start.

No-MI Loan gives more flexibility to Massachusetts homebuyers

MassHousing has unveiled a new mortgage product that does not require mortgage insurance (MI) but still offers affordable interest rates, low downpayment requirements and local loan servicing.

Like a traditional MassHousing mortgage, the No-MI loan can be used to purchase a 1- to 4-family home, requires a 3% downpayment (5% for 2- to 4-family homes), and may be used for purchase or refinance. And of course, borrowers must be creditworthy and must meet income and loan limit guidelines.

But unlike a traditional MassHousing mortgage, borrowers who make downpayments of less than 20% of the purchase price are not required to have mortgage insurance, though they do pay a higher interest rate. Still, the savings and the expanded buying power are substantial. Compared to an FHA loan, a family purchasing a $200,000 home with a $7,000 downpayment would save $125 per month and $45,000 over the life of the loan.

All of this is not to disparage mortgage insurance, which has enabled countless families to purchase a home with low downpayments. And while traditional mortgage insurance protects only the lender in case of default, MassHousing's traditional mortgage features MI Plus, a unique borrower protection that helps pay the mortgage in cases of job loss. MassHousing will continue to offer borrowers a loan with MI. After all, in addition to the job-loss protection it provides, the lower premiums of MI Plus save a borrower $71/month ($25,560 over the life of the loan) compared to FHA.

See how MassHousing's loans compare to FHA. Or, learn more about the new MassHousing No-MI Mortgage.