Lending The Ticker

Bank of America now offers 3% down mortgages without mortgage insurance

Partners with Freddie Mac, Self-Help Ventures Fund

Bank of America

Bank of America unveiled a new affordable mortgage program that offers consumers the option of putting as little as 3% down and requires no mortgage insurance. The program does not involve the Federal Housing Administration, whose program has recently undergone a lot of scrutiny from big banks. 

Bank of America announced a partnership on Monday with Self-Help Ventures Fund and Freddie Mac for its new "Affordable Loan Solution" mortgage, a conforming loan that provides low- and moderate-income homebuyers access to a responsible lending product with counseling at affordable entry prices.

To make the program function, the three companies will work together to help ensure the loan is properly originated and backed in case the loan goes delinquent, the companies said Monday.

For starters, Bank of America said the mortgage will be available through all of its mortgage sales channels.  

Self-Help, which is based in Durham, North Carolina, will then buy the loans and servicing rights, along with providing post-closing counseling for any borrowers who might be experiencing payment difficulties.

Since Self-Help is taking the first-loss position, the loans require no mortgage insurance.  

Freddie Mac will purchase all of the eligible affordable mortgages originated via the Self-Help and Bank of America partnership, having recently approving Self-Help as a seller/servicer to facilitate the rollout of this offering to borrowers.

The program allows down payments as low as 3% on the purchase of a primary, single-family residence, with no reserve funds required in most situations.

The loan also requires a minimum FICO score of 660, and first-time buyers will need to participate in homebuyer education.

“There is a need in today’s marketplace for more responsible mortgage products that enable creditworthy homebuyers, who meet certain income limits and other requirements, to become homeowners at an affordable entry point with comprehensive counseling,” said D. Steve Boland, consumer lending executive, Bank of America.

“Affordable Loan Solution combines Bank of America’s wide distribution network of mortgage professionals with the borrower support expertise of Self-Help and market liquidity provided by Freddie Mac to provide a new affordable loan option,” said Boland.   

The news comes amid a pushback against the FHA, which offers similar style loans, from lenders for its loan requirements. 

The FHA, unlike Bank of America’s new program, offers loan options with as little as 3.5% down mortgages, along with 520 FICO score. It’s important to note that the two are not offered together.

As a result, major lenders have pulled away due to the heightened risk of possible enforcement actions on the high-risk loans.

John Shrewsberry, Wells Fargo’s chief financial officer, said last September that the San Francisco bank will not make loans to FHA borrowers with low credit scores because of their higher rates of default.

In addition, Kevin Watters, CEO of Chase Mortgage Banking, said in an interview with CNBC shortly after that the FHA's loan requirements look an awful lot like subprime lending.

"FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5% down; that's subprime lending, and we're not in the subprime lending business," CNBC quotes Watters saying.

Quicken Loans is already in the middle of legal battle with the Department of Justice over its FHA loans, which is pushing the nonbank to consider ending its participation in FHA lending entirely, citing the government’s aggressive enforcement policies as the main reason for potentially dropping FHA lending.

Meanwhile, Bank of America’s loans require no mortgage insurance since the loss is covered by Self-Help, and borrowers are required to have a FICO score of 660.

Self-Help added in a statement to HousingWire that research by the UNC Center for Community Capital has continually proven that, given sound underwriting, low down payments are not a significant factor in mortgage performance. Shutting out borrowers with lower down payments is a missed opportunity for lenders and borrowers alike, Self-Help said.

The research from the UNC Center for Community Capital found that losses on these loans remained relatively low, even during the housing crisis triggered by mass marketing of unaffordable subprime loans.

Bank of America has upped it mortgage lending lately. In its fourth-quarter earnings, the bank reported that total mortgage production grew 13% to $17 billion in the fourth quarter, up from $15 billion last year. This is slightly up from $16.9 billion last quarter.

And during the company’s fourth-quarter earnings call, when Brian Moynihan, CEO of Bank of America, was asked what his outlook for continuing to take share in the mortgage business was, Moynihan said that the bank is focused on originating prime and sort of non-conforming loans.

Back in November, Freddie Mac CEO Donald Layton asked for mortgage lenders to consider writing more low down payment mortgages in order for the government-sponsored enterprise to help increase access to credit to potential homeowners.

The GSE also announced a partnership with Quicken Loans for more low-down payment mortgages.

"The strength of the Affordable Loan Solution program is how it brings each partner’s special expertise together to address the barriers faced by aspiring homebuyers with limited savings," said Danny Gardner, vice president, affordable lending and access to credit, Freddie Mac. "Freddie Mac is committed to working with industry and community leaders like Bank of America and Self- Help to find better ways for helping eligible borrowers overcome the obstacles that stand between them and successful long-term homeownership.”


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