Lending, whether through a private individual or a traditional institution, is an integral piece of an investor’s arsenal. For all intents and purposes, using other peoples’ money is the lifeblood of the average residential redeveloper. Those who find funding easy to come by undoubtedly have an advantage. However, those with less than pristine credentials may find it much more difficult to acquire. That is, until now: borrowers with blemishes on their credit applications – like a brief loss of employment or a temporary dip in their credit score – are starting to have better luck when receiving a loan from smaller lenders. With the state of the housing sector being what it is, smaller firms are more willing to take risks on borrowers with less than perfect credit.
RPM Mortgage Inc. Chief Executive Officer Rob Hirt told Bloomberg “Some lenders became afraid of their own shadows.” The bank started a program this summer for borrowers who have higher debt burdens or who had sold a home for less than the outstanding mortgage. “The market is beginning to realize that if you make smart and sound loans to people who don’t fit in the narrow box, it doesn’t make them a worse risk.”
Conversely, larger lending institutions appear to be heading in the opposite direction. The likes of JP Morgan Chase & Co. and Bank of America have gradually tightened their credit standards in light of what happened during the course of the downturn.
The average score on mortgages that government-controlled Fannie Mae and Freddie Mac bought now stands at about 740 – well above the 660 level that is considered subprime. Some of the big banks are reluctant to ease their credit standards, concerned that Fannie, Freddie, and the FHA will force them to buy back bad loans with underwriting errors; the banks do not want to take on the risks of loans that the government programs won’t insure, Bloomberg reports.
Of course, their reluctance is well founded. At the onset of the recession through 2012, traditional lending institutions reported nearly $200 billion in losses.
Of particular interest, however, is the population being serviced by lending institutions of a smaller nature. Caution exercised by big banks has created an opportunity for smaller ones. Where big banks are avoiding risky clientele, small banks are capitalizing.
But where big banks are stepping back, small banks are stepping in. For example, Shellpoint Partners LLC’s New Penn unit began this summer to offer mortgages for home buyers with debt-to-income ratios up to 55 percent and interest-only loans when borrowers have “high disposable income” or “high income potential due to their line of work.” Lone Star Funds’ Caliber Home Loans Inc. also debuted this summer new programs that offer flexibility for foreign nationals and on purchases of condos without approval for government programs. TD Bank’s Right Step program allows borrowers to put 3 percent down and not have to pay mortgage insurance if they have credit scores of 660 or above. Banc of California is providing loans to borrowers who have a foreclosure or late payments on their records, as long as they can make a down payment of at least 20 percent and show other strong assets in their finances.
With smaller banks willing to make loans to those who otherwise wouldn’t have been able to qualify, more buyers will be allowed to participate in the market. Perhaps even more importantly, the increased activity bodes well for millennials – the generation in which many believe hold the key to recovery.
Approximately 85 million people make up the millennial generation – those born in the early 80s through 2000. It is these individuals that are said to have received the brunt of the downturn. This group suffered the most during the 18-month recession starting in December 2007, said Harry Holzer, professor of public policy at Georgetown University in Washington. They were often the most recently hired, which made them more likely to be fired when companies cut back spending. Essentially, their inexperience made them expendable. Problems were only compounded in the face of mounting student debt, making it all but impossible to buy a home.
With the easement of credit standards and a strengthening economy, millennials are more capable of purchasing a home now than they were in the past. Their return to the housing market should essentially boost the entire housing sector. Perhaps their involvement will provide the traction the recovery needs.