With credit drying up, many banks have begun demanding larger down payments and requiring higher credit scores for borrowers, said Shelia S. Martin, director of program operations for the Housing Partnership Development Corporation, which builds subsidized housing in New York City. That trend has increased the need for the state mortgage agency’s program, she said.
“They were the go-to people, because you could qualify people who had good credit but not enough income” to receive market-rate mortgages, Ms. Martin said. “That half a point to a point made a difference,” she said, explaining that the lower interest rates meant lower monthly costs for people of modest incomes.
The state agency traditionally has made home-buying more affordable by subsidizing interest rates that were lower than market rates by half a percentage point or more. Ms. Almodovar said the agency decided this week to switch to offering market rates rather than raise the minimum for down payments or make other changes to its requirements to qualify for the loans. She said the agency’s lending standards were already stringent enough.
The agency’s current fixed rate on a 30-year mortgage is 6.25 percent. By contrast, M&T Bank, a Buffalo-based bank that lends to home buyers statewide, was offering 30-year fixed-rate mortgages at 6.55 percent, said Michael Todaro, M&T’s senior vice president for mortgage and consumer lending operations.
The report further notes that lenders are beginning to demand higher down payments and requiring higher credit scores from borrowers.
As if both of those are bad things?
The reason that we're in this fiscal mess is because banks were mandated to lend to those who had no money to put towards down payments, which traditionally were 20% of the total price of the home and provided sufficient collateral and equity in the property, all in the name of affordable housing and increased access to homeownership for minorities.
By putting 20% down, borrowers would eliminate the need for purchase mortgage insurance (PMI) or secondary loans to avoid paying PMI. Higher credit scores reflect the ability of the borrower to repay the loans. It's the way to maintain sufficient credit on hand and protect against down markets.
The markets lack sufficient credit on hand because the subprime paper lacks sufficient credit backing it, and the paper isn't worth anywhere near as much as it was valued.
At a time when banks are concerned about their loans being repaid in a timely fashion and want safer and more secure terms, New York is still pushing for lending to those who may not be good credit risks. This is a singularly bad idea, and only will serve to exacerbate the problem.
Still, it's instructive to note that the credit markets haven't completely frozen. It's just made it far more difficult for anyone with subpar or bad credit to get approved (and that's a good thing):
Ms. Martin said banks had been allowing borrowers’ monthly mortgage costs to equal half their gross incomes. But she said that in recent months that limit had dropped as low as one-third of monthly income before taxes. The stricter standards and rising rates have discouraged people from buying the apartments and multi-family houses the housing partnership is building in the Bronx and elsewhere in the city, she said.
“People are just nervous and not as eager to buy,” she said.
Mr. Todaro said M&T and other banks were still making mortgages to “well qualified” first-time buyers, but he said lenders had tightened their standards. The days of buying a home with down payments of 3 percent or less are over, he said.
“There is still adequate mortgage credit available,” Mr. Todaro said. “We’re doing less business today than we were doing a year ago. But it has not fallen off remarkably.”
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