Lenders, GSEs Target Non-Traditional Borrowers

NEW YORK–Credit “invisibles;” “boomerang borrowers;” those with thin credit files and repaired credit; Millennials–these are the labels given to those seeking access to credit and to whom savvy lenders are turning their attention.

“As we face the next decade of growth, we’re facing a whole new set of demographic challenges and opportunities,” said Faith Schwartz, senior vice president of government affairs with CoreLogic, Washington, D.C., here at the MBA National Secondary Market Conference & Expo.

Schwartz noted that distressed housing trends continue to subside from the peak of the housing crisis in 2010, resulting in more homeowners seeing positive equity in their homes and more people, particularly minorities, ready to move into homeownership. Combined with low interest rates and “pristine” mortgage performance, she said, home affordability continues to slope upward and mortgage credit has increased despite tighter underwriting standards.

“Policies driven by the government appear to be geared toward expanding the credit box,” Schwartz said. “But incentives within the system appear to challenge the ability of lenders to expand the credit spectrum…our challenge is to strike the right balance.”

Nathan Burch, president of McLean Mortgage Corp., Fairfax, Va., noted 639 and below credit scores are “tough. They think there are loan programs that are not available to them.”

Marisa Calderon, executive director of the National Association of Hispanic Real Estate Professionals, San Diego, said in 2015, Hispanic households grew by 486,000, representing 37 percent of total U.S household growth. “Hispanic households are going to drive housing growth for the foreseeable future,” she said. “The Hispanic homeownership growth rate grew as homeownership growth rates for the rest of the country fell.”

More importantly, Calderon, said, Hispanics have strong enthusiasm for homeownership. “They see homeownership as an important part of their dream,” she said. “And they see homeownership as a multigenerational issue, with many generations living in the same house.”

Barriers remain, however. Calderon noted nearly 25 percent of Hispanic home buyers conduct their transaction entirely in Spanish. “There is an increasing need for cultural competence among lenders, not just the ability to speak Spanish,” she said. “The Hispanic community places a strong emphasis on trust-driven decision-making; they want to work with people who understand their particular situation.”

Danny Gardner, vice president of affordable lending and access to credit with Freddie Mac, McLean, Va., said his company’s research found that a large percentage of renters aspire to own, with 21 percent “actively” working to buy a home and just 13 percent saying they would never pursue the option.

“There are many positive trends for lending in the future,” Gardner said. “It’s simply a matter of them maturing into household-formation and finding the funds for a home purchase.”

Gardner added that down payment assistance programs will be key to help these potential borrowers to compensate for the depressed wage environment stemming from the Great Recession.

Gardner noted that Freddie Mac’s Home Possible Advantage program is aimed toward this demographic. “We’re seeing that the 680-720 credit score cohort is still underrepresented in the credit spectrum,” he said. “This product targets that cohort….and is definitely targeting the first-time home buyer demographic.”

“Demographics are destiny; it’s the consumers you have to serve,” said Anne Segrest McCulloch, senior vice president of credit and housing access with Fannie Mae, Washington, D.C. “The landscape that we’re working in is changing, and nowhere is it more apparent than the two ends of the demographic barbells–Millennials and Baby Boomers.”

The Millennial generation, in particular, have the potential to have the most impact, McCulloch said, and face different challenges. “They are the most diverse generation and they are the most underworked generation,” she said. “Lack of funds is their biggest obstacle to homeownership.”

However, McCulloch said that situation is changing. “Their incomes are improving and they are optimistic that they will become homeowners,” she said. “Not only that, they plan to be homeowners by age 30.”

What this means, McCulloch said, is that the lending industry faces a “giant” demographic group that plans to move into homeownership. “They’re not going to have a lot of money for a down payment, but if you can be flexible in your approach and in your programs, you are going to do well with this group.”

On the flip side, McCulloch said more Baby Boomers are taking mortgages into their retirement. “They want to age in place and they want to stay in their communities,” she said. “But the nation’s current housing stock is not adequate for their changing lifestyles…renovation finance is going to be key to this demographic, not only for their accessibility, but to ‘green up’ their homes.”

Baby Boomers, McCulloch added, are more financially able to handle these renovations. “They have the income and they have the equity,” she said. The company’s Home Ready product is designed for these households and takes into consideration non-occupant co-borrowers and other income sources; and the Home Renovation and Homestyle Energy products target borrowers who want to age in place and renovate their homes.

“We focus on all the people who used to be able to get a mortgage,” said Matt Nichols, managing partner with Deephaven Mortgage, Charlotte, N.C., which buys non-Qualified Mortgage loans. “Clearly, the box of 2006 was too wide; the box of today is too tight.”

Nichols said his company focuses on segments of the population who continue to have problems getting mortgages, such as self-employed, borrowers with lower FICO scores and borrowers who are re-emerging in the market after burning out during the Great Recession.

“We’re funded by private capital; our rates are not conforming rates,” Nichols said. “We’re looking at borrowers who don’t have access to credit, so we’re not dealing with people who can qualify for a 4 percent rate. Our rates are 5, 6, 7, even 8 percent, and for our borrowers, that is a good loan.”