WITH interest rates hovering at 20-year lows, buying a home has become more feasible for lower-income families. Now lenders are trying to broaden the mortgage market even further by altering the criteria used to determine suitable borrowers.
``Everybody in the industry is looking for ways to break down the traditional view of creditworthiness.... There's a lot of talk about innovation,'' says Robert O'Toole, senior staff vice president at the Mortgage Bankers Association in Washington. Right now, ``it's a pretty homogeneous underwriting world.''
``We're trying to improve the way we qualify borrowers,'' adds John Hemschoot, director of home mortgage standards at the Federal Home Loan Mortgage Corporation (Freddie Mac) in Washington.
Their efforts are being helped along by the Clinton administration's proposed reforms to the Community Reinvestment Act. These reforms are designed to encourage banks to provide more credit, services, and investments to low- and middle-income communities. Although they will not directly affect mortgage companies, competition from banks to provide loans may spur new types of mortgages. New method of assessment
Last month, Freddie Mac began testing an ``Alternative Qualifying'' process with Sears Mortgage Corporation and Mortgage Guaranty Insurance Corporation (MGIC).
Traditional qualifying methods use housing payment-to-income and debt-to-income ratios to determine how much borrowers can afford as a monthly mortgage payment. The alternative qualifying (AQ) initiative, however, will take into consideration the borrower's ability to manage finances and repay debt.
``Testing AQ is one step toward leveling the playing field for low- to moderate-income borrowers who might be excluded when evaluated on debt-to-income ratio,'' says Walter Klein, chairman and chief executive officer of Sears Mortgage Corporation. ``AQ is especially suited for first-time buyers who have demonstrated that their budgets can accommodate high levels of rent payment.''
``People handle their finances differently ... and some won't ever fit into the [traditional] mold,'' says Nancy Condon, a Freddie Mac spokeswoman. For example, an applicant who has allocated 45 percent of his or her monthly income to rent and has managed other expenses may qualify under these new standards, she says.
In the testing stage of the AQ initiative, 1,000 loans will be available to borrowers in Chicago, followed by Atlanta, St. Louis, Boston, and Los Angeles County. Sears Mortgage Corp. will provide underwriting and MGIC the mortgage insurance. Freddie Mac will buy the loans from Sears.
``The fact that the secondary market is doing it [testing Alternative Qualifying methods] is important,'' Mr. O'Toole says. Along with the Federal National Mortgage Association, Freddie Mac buys loans from banks and other lenders. Bad debtors get a break
Lenders are reevaluating bad credit as a disqualifier as another way to approve loan applications. For example, pre-loan counseling may be used in bad-credit cases that would usually not qualify for a loan.
``There's an increase [of interest] in the `B' and `C' market,'' O'Toole says, referring to higher risk borrowers. ``It's an effort to reach out to markets they haven't served before.'' It is also an effort to ``capture that market,'' Mr. Hemschoot says. ``It is a profitable marketing niche that has not been exploited.''
Recently, Arbor National Mortgage Inc., a private lender, announced expanded qualifying ratios for loans, mostly refinancings. Like the Alternative Qualifying initiative, Arbor's ``50/50 Homeflex'' mortgage will consider the borrower's credit history and proven ability to dedicate a high percentage of monthly income to housing. Up to 50 percent of income may be used for all debt payments.
The 50/50 Homeflex mortgage is aimed at assisting ``people who purchased homes during the late '80s,'' says Nancy Boles, Arbor's senior vice president. ``A dual-income couple that previously qualified for a loan under the 28/36 qualifying ratio may have since had a baby and one of the spouses has stopped working.'' Although the borrowers have maintained payments, they may no longer qualify to refinance under the old ratios.
The 50/50 ratio may be the highest one advertised publicly, Hemschoot says. The only drawback is the 25 percent downpayment (or 25 percent home equity for refinancing). In some cases, only a 5 percent downpayment would be needed under the Alternative Qualifying initiative.