Richard Ferguson: Preserving Down Payment Options in a Disruptive Market
Richard Ferguson is President CBC Mortgage Agency, South Jordan, Utah.
There is no downplaying the destruction the COVID-19 pandemic has had on our economy and the financial lives of millions of Americans. But it is also threatening the up-and-coming generation of home buyers, particularly minorities.
While the CARES Act gave temporary payment relief to millions of homeowners in the form of forbearance, it also created tremendous disruption in the secondary mortgage finance markets. By promising borrowers they could forego paying their mortgage for up to one year with no questions asked, the federal government pushed the servicing values of some loans to zero or negative overnight. And since servicers still owe underlying loan investors regardless of whether borrowers make payments, many are now facing insolvency, especially without a credit line from the federal government to help.
With the secondary market convulsing, both the prices investors are willing to pay for mortgage-backed securities and servicing values have tanked. Aggregators are now pricing loan purchases very defensively. And to compound the problem, mortgage lenders have severely tightened their underwriting guidelines under the fear of mounting forbearances.
Typically, when the economy is hurting and credit tightens, FHA loans have come to the rescue of first-time buyers—especially minorities, who typically have the highest hurdles to jump when it comes to buying a home. The problem this time is that investors who buy FHA securities and the lenders who service these loans are projecting massive losses due to the wave of forbearance requests. That means FHA loans are now more expensive for consumers and have tighter guidelines.
Today’s environment is also affecting access to down payment help. Many housing authorities have introduced restrictions to limit the financial impact of new loans coming into their portfolio. Since many agencies use aggregators to price their FHA loans, they have been forced to lower their pricing in response to worsening servicing values and mortgage-backed securities values. As a result, many originating lenders have had to cut off or severely restrict programs that included down payment assistance for fear of being stuck with a loan they can’t sell.
The lack of down payment options disproportionately affects minorities, who are less likely to have access to family members who can help them with a down payment. According to 2016 data from the Federal Reserve Board’s Survey of Consumer Finances, for example, the typical middle-class black household had one-tenth the wealth of the median white household.
And yet, we’ve been able to make a difference. Through innovative strategies such as secondary market trades and locating additional sources of capital for down payment assistance, the Chenoa Fund is still fueling the homeownership dreams of future homebuyers. In fact, we are even expanding down payment assistance options while simultaneously lowering costs.
How? At CBC Mortgage Agency, which manages the Chenoa Fund, we do not rely on the whims of aggregators’ restrictions or pricing. While many housing authorities have raised their pricing, we’ve been able to increase the number of people we can help. In fact, our interest rates are at historic lows, and we anticipate further reductions soon, which brings added savings to borrowers.
Today our volume has increased rapidly as a result of our great rates. For example, our FHA Rate Advantage program currently boasts a 3.25% rate. That’s better pricing than what many borrowers get with FHA loans without down payment assistance.
Yet overall, down payment assistance opportunities remain at risk. In the past, FHA has signaled its desire to limit the use of down payment assistance from government entities like the Chenoa Fund while leaving untouched the ability of a family member to provide a gift to a new borrower. Such a course of action would exacerbate an already fragile market and effectively shut out large swaths of minority homebuyers. Minority homeownership levels are already at embarrassingly low levels. For example, the black homeownership rate is currently at 41 percent compared to 73 percent for whites. Restricting access to down payment programs will only widen this gap.
Especially now, regulators must expand homeownership opportunities for our most financially vulnerable populations and not relegate them to being a permanent renting underclass. FHA, for instance, can address performance concerns by instituting a monitored loan marketplace, much like the Neighborhood Watch system, where performance of loans provided by providers of down payment assistance can be tracked and monitored for risks to the insurance pool.
At the end of the day, down payment assistance providers such as CBC Mortgage Agency have created a strong response and counterbalance to the federal government’s generally conservative response to help mortgage servicers during the COVID-19 pandemic. We are proof that market-based solutions can increase competition and bring costs down for consumers while protecting the homeownership dreams of many – especially when times are tough.
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