What's Making High-End Mortgages Easier To Get?

After frosty years, mortgage lending is warming up a bit, at the top.

The window of opportunity has opened a crack for high-end borrowers with good credit as lenders have become more willing to write jumbo mortgages — and as a few have come out with new offerings such as mortgage products aimed at the self-employed.

"Credit availability is still extremely tight," Mike Fratantoni, chief economist for the Mortgage Bankers Association, told IBD. But "it has been loosening around the edges, particularly for jumbo (mortgage) borrowers and high-income and high-net-worth borrowers.

"That type of lending has re-emerged and there's even been some relatively low down payment programs and easing of credit standards for those jumbo products. But for the bulk for the market we haven't seen any movement in the credit parameters.

Lenders remain cautious overall amid new underwriting rules effective in January, and with concern that if they loosen their purse strings too much they'll risk having to buy back defaulted loans.

Financing's Effect

More financing options for borrowers should help drive more homebuying, however, which in turn should help the housing market recovery build momentum and drive business for builders such as Toll Bros. (TOL), PulteGroup (PHM) andLennar (LEN), real estate analysts say.

Adds Lawrence Yun, chief economist for the National Association of Realtors: "We are beginning to hear that underwriting standards are being relaxed ever so modestly. But overall, they're still stringent.

"Relatively weak demand has been an important factor keeping home sales low," Fratantoni said by email. "However, now that the job market has strengthened considerably, we are still seeing a relatively weak home sales market. Tight credit is at least one reason for this disconnect between the strength in the broader economy and the lagging housing market.

But there has been some easing of standards for well-heeled borrowers: "Mortgage lending continues to loosen up gradually," Donald Salmon, CEO of TBI Mortgage Co., the mortgage banking unit of luxury builder Toll Bros., told IBD.

"I don't see any cliff. But over time, we've seen the parameters become more reasonable.

When compared with three or four years ago, credit score hurdles have dropped a bit, he says, and more community banks are getting involved and getting more creative.

Builders Try DIY

With new houses to sell, builders are in a prime position to seek lending options suited to their buyers.

"Because the larger banks do not consistently meet our needs, we have hired an ex-Freddie Mac (FMCC) executive to create relationships with community banks and credit unions," Salmon said by email. The effort "shows great promise as we have introduced or are about to introduce several options that large banks do not make available to us.

That includes options for buyers who may be self-employed or who are foreign nationals, he says.

Salmon says he's seeing "greater availability" of products for self-employed individuals with good credit.

Can Entrepreneurs Qualify?

One such offering is a "bank statement loan," in which a lender looks at a self-employed borrower's cash flows over an extended period of time, often 12 months, to confirm that the borrower has the ability to repay. This type of loan is offered only to self-employed borrowers, he says, because it can be more difficult to substantiate a self-employed person's true disposable income. TBI also offers several interest rate "lock-in" options for up to a year. The options vary but most have a "float down" feature that "affords the buyer a lower interest rate if rates have dropped," says Salmon.

"In effect, they are 'capping' their interest rate exposure," he adds. "Consumers find this attractive because it gives them certainty about the real cost of their new home.

Keith Gumbinger, vice president of mortgage tracker HSH.com, says lending innovation has been slow to arrive in this housing market recovery vs. past ones, due to new regulations and that lenders are "still being penalized for borrowers that were riskier five to 10 years ago.

But many lenders are looking more closely at "niche audiences and viable markets.

Great Credit, Big Loans

One example, Gumbinger says, is the revival of jumbo mortgage lending, aimed at "the best-of-the-best" borrowers. Jumbo mortgages are loans of over $417,000 in many housing markets and more than $625,500 in some high-cost areas.

"As we have wandered away from the worst of the downturn, property prices and the economy have improved and lenders' books have begun to recover, so we've seen a revival in portfolio lending," he added. "Portfolio lending is when a lender originates a mortgage using its own funds with the intention of holding onto it as an investment.

Real estate analysts say a big deterrent to product development and the easing of credit standards is the qualified mortgage, or "QM," rule by the Consumer Financial Protection Bureau, effective Jan. 10. The regulation, which gives lenders some protection from lawsuits, requires that for loans to be "qualified mortgages," borrowers must meet certain income thresholds for the size of the mortgage.

The guidelines aim to ensure that only people who can afford to pay back loans can get them. Fratantoni says implementation of the regulations has created a change in the "dynamics of the market." He says in previous cycles you would see a lot of new products being offered.

"With the ability-to-repay rules, it's difficult to design an (adjustable-rate) mortgage loan that fits within the parameters," he added.

Yun says bank loans made the past four years have done "outstandingly with very low default rates." But many lenders still fear "cutback risk," where the government forces them to pay back a defaulted loan.

And lenders want to limit risk.

"If you talk about loosening credit standards and going down to lower-FICO borrowers, the risk and concern that lenders have is those loans are going to have a higher likelihood of default," said Pete Mills, senior vice president for residential policy at the MBA. "And when that happens, the concern is that lenders will be forced to buy those loans back, based on some manufacturing or underwriting error that was made. That is a significant risk."