Navigating the New Territory of Financing in Today's Real Estate Recovery

The real estate industry is finally beginning to stabilize, giving real estate agents, brokers, and real estate support industries reason for guarded optimism. Record-low interest rates, combined with more consumer confidence in the overall economy are bringing buyers back to the market. As more buyers return to weekend open houses, the prevailing question on the minds of that potential client is locating an affordable mortgage.


Real estate professionals can grow their business exponentially if they position themselves as a resource that helps clients secure the buying power they need to afford their first or next home. Here are just a few tips:

• Know prevailing mortgage rates. Mortgage rates change daily based on market conditions, shift in indices and bond markets, lender pricing, and a number of other factors. Stay up to date on rate trends resources that publish daily rates. Developing a relationship with a mortgage broker who has access to a number of lenders extends your knowledge base even more.

• Assess your clients’ long-term goals to recommend the best loan program. Depending on the motives behind your clients’ search for a new home, their goals may or may not be met with the traditional 30-year-fixed loan product.

• Understand lenders’ underwriting guidelines. Even for stable homeowners looking to buy a larger home, loan-to-value requirements, debt-to-income ratios, what qualifies as liquid assets, and other factors can create a maze for your clients aspiring for a new home.

Real estate agents and brokers should also familiarize themselves with alternative loan products, which are better-regulated products than in the previous cycle. Underwriting standards have tightened considerably, making it tougher for clients to qualify for a traditional 30-year fixed mortgage. For example, there are clients with great credit, but lower income or higher debt levels than lenders are comfortable with, as well as clients with less-than-perfect credit and even those whose long-term goals aren’t best suited for a standard loan. It’s in the real estate professional’s best interests to partner with a mortgage professional who knows the latest loan sources and loan products to better educate your clients.
These products include:

• FHA mortgage programs that typically require lower down payments and are more lenient with credit criteria

• 40-year fixed loans amortizing the loan over a longer period, offering the security of a fixed payment lower than the traditional 30-year mortgage

• 15 and 20-year fixed loans for clients with a tolerance for higher payments looking to maximize equity over a shorter period of time

• Adjustable rate loans with beginning interest rates considerably lower than their 30-year fixed counterparts

• Fixed / Adjustable Rate Loans, with a lower interest rate fixed for 3, 5, 7 or 10 years

• “Hard Money” loans carrying higher interest rates and shorter terms for buyers with strong income and reserves, or needing to use the capital as a bridge loan to meet LTV requirements or other criteria

• Jumbo loans exceeding most lenders’ conforming loan maximums for buyers

There are a number of ways for real estate professionals to make the most out of the recent good fortunes befalling the housing industry. But knowing how to connect homebuyers with the best mortgage, at the best price, and in the least amount of time will put the savvy real estate pro ahead of the pack and helpt to close more transactions.

Is the Marketplace Poised for a Return of Alternative Loan Products?

A return on the horizon for alternative loan products is inevitable.  While the products associated with this category have all but vanished, a new type of borrower is emerging that will reshape how loans that don’t fit the traditional 30-year-fixed model are fashioned.

Single family loans originated in 2010 and 2011 has proven to be the most solidly underwritten loans in years according to recent data from LPS.  While lenders’ conservative credit standards have been vilified as excluding many potential buyers from the market, the upside is that high quality mortgages are being originated by lenders, and eventually purchased by GSEs. 

From the lender perspective, this could indicate no need for subprime, Alt-A, or other types of “exotic” loans which were considered to be the root cause of the mortgage meltdown.  The issue with these products was that their underwriting standards weren’t based in reality. The predominance of these vehicles in the market was driven by lender/mortgage broker misuse, by marketing securities based on pools of mortgages with these shaky underwriting yet high returns, by appraisers being aware of the value needed for the loan to happen, and by poor oversight by government entities that guaranteed these products. As a result, poor loan quality destined for default was a defining element of this product set.

Stricter underwriting and scrutiny by regulators made subprime and Alt-A products virtually extinct and made borrowers with strong credit, deep reserves, and positive equity in existing properties the perfect borrower scenario for lenders. But now, the pendulum has swung the other way; qualified buyers who don’t meet these criteria are left in the cold and risk-averse lenders have taken the position that it is better to hold off on lending except in a perfect borrower scenario.

The need exists, however, to service this class of borrower.  New regulations governing our current lending environment, combined with more responsible lending practices, should provide the necessary restraints to prevent the credit misuse characteristic of alternative loan products seen in the last lending cycle.

Regulations requiring appraisals independence from broker shops, the end of yield-spread premium bonuses paid by lenders to brokers, and more upfront consumer disclosures are examples of current practices which should mitigate the risks of inflating home values and stop predatory marketing of non-traditional loan products to unqualified borrowers characteristic of the past real estate boom.  Moreover, the mortgage industry has taken a much more responsible stance toward to who it lends money.

The end result of these factors is twofold:  home values are substantiated and grounded in fair market value, and buyers will be vetted by a clear ability to afford the purchase price.  As the market stabilizes, more lenders should then feel comfortable originating loans at higher loan-to-value ratios, relaxing FICO criteria, or eventually streamlining documentation requirements for qualified buyers. 

“Qualified buyers” is of course, a moving target as the housing market regains its confidence and equilibrium.  But the class of qualified buyer is sure to grow past what the standard conforming 30-year loan model can accommodate. Lenders will need to relax some standards and offer new or better monitored “old” products to fill the void.