Mortgage Lenders Make Changes to Encourage Home Ownership

Andrew Khouri reported on Friday at the Los Angeles Times Online that, “Home prices are rising across the country and mortgage rates, though still historically low, are up since the presidential election.

“Simply put, buying a home isn’t easy, especially in high-cost metropolitan areas such as Los Angeles County, where the median price of a home hit $569,000 in June.

But changes in the mortgage industry are afoot, with the goal of loosening some of the strict standards established after the subprime crisis — rules some blame for impeding sales.”

The article noted that, “Government-controlled mortgage giants Fannie Mae and Freddie Mac are paving the way by rolling out new programs to encourage home ownership.

“The companies, with their congressional mandate to promote home ownership, don’t originate loans, but purchase mortgages from lenders to keep the market moving. And any changes they make in the underwriting standards for the loans they buy can have a big effect.

“Also, lenders are moving to relax some standards partly because they fear losing business as home prices and mortgage rates rise, said Guy Cecala, publisher of Inside Mortgage Finance.”

The Los Angeles Times update also pointed out that, “The changes bring lending nowhere near the easy-money bonanza of last decade, which ended in financial crisis. But they have brought criticism from some corners that liberalizing rules for down payments and how much debt a borrower can have is a slippery slope that could eventually lead to another bubble.”

More specifically, Mr. Khouri explained that, “With the exploding cost of higher education causing some students to borrow more than $100,000, several changes are directly targeting young home buyers typically burdened with hundreds, if not thousands, of dollars in monthly student-loan payments.

“Among Fannie Mae’s changes:

  • If a borrower has some student loans or other non-mortgage debt paid by parents or others, those payments will no longer count toward their debt-to-income ratio.
  • Once a borrower becomes a homeowner, Fannie will allow them to qualify for a cheaper cash-out refinance if they use it to pay off their high-interest student loans.
  • If a student loan borrower is enrolled in an income-based repayment plan, the lower monthly payment can be used when calculating a debt-to-income ratio. Before, lenders often had to use 1% of the outstanding student loan balance as the monthly payment.”
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