For homebuyers, mortgages are safer but tougher to come by
Keri Weishaar lives in a spacious, four-bedroom house near Tampa, Florida, thanks to the easy financing that prevailed during last decade's housing boom.
"It was basically nothing to get into this house," said Weishaar, 48, who bought the house in the spring of 2003 after obtaining a no-money down, adjustable-rate mortgage.
Then again, Weishaar and her husband are fortunate to still have their home. That same mortgage eventually morphed into a financial albatross and, for a time, the house in the suburb of Tarpon Springs was on a countdown to foreclosure.
As home values plummeted after the housing bubble burst in 2007, many borrowers with exotic types of loans were stuck, unable to refinance as lenders began to tighten their lending criteria. That set the stage for cascading mortgage defaults that eventually took down Lehman Brothers, Wall Street's fourth-biggest investment bank at the time, 10 years ago this week. Lehman and other financial institutions were big buyers of securities backed by some of these dicey mortgages.
Today, getting a mortgage is tougher — and less risky. For one thing, no-money down mortgages and their ilk, which enabled many borrowers to initially lower the costs of buying a home but often saddled borrowers with far higher balances or steep monthly payment increases, have vanished.
Banks also remain a bit gun-shy after racking up billions in losses stemming from mortgages gone bad. That means homebuyers, especially those with less-than-stellar credit, face more hurdles qualifying for a mortgage than they did in the housing boom years. But the loans are safer, more transparent and actually take into account whether a borrower can afford to keep up with payments.
"The banks have certainly loosened underwriting criteria for low-risk borrowers; they haven't loosened underwriting criteria for low-credit score borrowers," said Aaron Terrazas, senior economist at Zillow. "The types of lending that we saw leading up to that crash in 2008, for the most part, we're not seeing nowadays."
When interest rates began to plummet at the start of the 2000s, lenders rushed in to make nontraditional loans that could be sold for hefty profits to Wall Street banks, as well as government-sponsored mortgage buyers Freddie Mac and Fannie Mae.
These riskiest of these loans required little proof that the borrower could afford to pay them back and an initial period of low payments and interest rates. Some let borrowers defer interest payments. Ultimately, these loans overwhelmed many borrowers' ability to keep up with payments.
That's what happened with Weishaar's mortgage. The loan was scheduled to adjust to a higher rate after three years, but she was able to refinance it with another adjustable-rate mortgage. The next time it reset, however, was late 2007, as the housing downturn accelerated. Her husband had lost his job and she was making less money. The couple's loan jumped from a 6.2 percent interest rate to 11 percent, jacking up the monthly payment from $2,101 to $3,417.
The easy financing, which had enabled the couple to buy their $346,800 house, backfired.
"We bought probably about $120,000 more home than we should have," Weishaar said.
After missing a few payments, the lender agreed to modify the loan. The interest rate dropped to 6.2 percent and the couple's missed payments and fees were tacked onto their unpaid principal.
The Weishaars rode out the turbulent economy and housing market in the years after the financial crisis and were able to refinance again in late 2014 into a 3.5 percent, 20-year fixed-rate loan. Now their payment is around $1,500, without taxes and insurance.
"I only have 15 years left on my house now and I'm in a good place," said Weishaar, now director of sales for an IT consulting company. "The next house I buy will be paid for in cash."
The private market for mortgage-backed securities, which helped fuel so much easy lending during the housing boom, is now a sliver of what it was back then.
Mortgage-backed securities issued by private firms now represent about 4.5 percent of the market, according to data from Inside Mortgage Finance and the Urban Institute. In 2006, the peak of the housing boom, it was nearly 60 percent.
Government-sponsored enterprises such as Fannie Mae and Freddie Mac now account for about 95.5 percent of the market.
Legislation aimed at averting another financial crisis set out certain guidelines that lenders must follow if they want to make their home loans eligible to be guaranteed by the government. The biggest change is a rule requiring lenders to establish the borrower's ability to repay the loan.
In the case of a five-year adjustable-rate mortgage, that means ensuring the borrower can afford to pay the loan should it reset to a higher interest rate.
The law, known as Dodd-Frank, also nixed the types of risky loans offered during the housing bubble, among other changes.
"For the average consumer, the biggest thing that has changed is it's a lot clearer at the closing table what kind of loan you're getting and what you can expect to pay over the life of the loan, and that's a very good thing," said Jesse Van Tol, CEO of the National Community Reinvestment Coalition, which advocates for fairness in housing, banking and business.
The guidelines may offer lenders a clear path on how to gauge qualified buyers, but in many cases banks have overlaid stricter qualifying requirements, like higher credit scores.
That's one reason the average FICO score on home purchase loans has drifted about 21 points higher over the past decade, according to data from the Urban Institute. The trend is more pronounced in metropolitan areas with high home prices. Consider that in San Francisco, the average FICO score for borrowers is around 774. In the Riverside-San Bernardino metropolitan area east of Los Angeles, FICOs average 717.
The average FICO score in America was 700 last year. A score of 740-799 is considered "very good."
"The pendulum has swung too far in the other direction," Van Tol said. "When you look at a Fannie Mae or Freddie Mac-backed loan with an average credit score in the high 700s, homeownership at a 50-year low, and a lot of people boxed out of the mortgage market, certainly credit is too tight. Too few people have the opportunity to become homeowners today."
Buyers are seeing some relief from nonbank lenders such as Quicken Loans, United Wholesale Mortgage and Carrington Mortgage, which are growing players in the residential lending market.
The share of loans issued by nonbank lenders and backed by the government has been climbing since 2013. The median FICO scores for loans issued by nonbank lenders and sold to Fannie Mae and the other government mortgage buyers are lower than those of loans from banks, according to the Urban Institute.
Unlike many homebuyers enticed by the frenzy of easy lending during the housing boom, Christian Ray resisted pushing the limits of what he could afford when he became a homeowner last month.
A logistics manager for a beverage company, Ray bought a two-bedroom, two-and-a-half bath townhome in Tampa for $158,000, even though his lender qualified him for a $240,000 mortgage.
"I'm not going to be married to the house," said Ray, 23. "I literally would just come home, pay the bills and just stay here and barely feed myself."
Ray also opted for just about the most unexotic, vanilla home loan around: A 30-year, fixed-rate mortgage at 5 percent interest. And he put up a 10 percent down payment.
"I'm not going to take 30 years to pay it," Ray said.