Opinion: Affordable lending requires creative thinking

It's not just risk that holds lenders back from their affordable lending goals

Each fall, trendsetters at Pantone decide on the next year’s “color of the year,” which they feel will define and influence the upcoming year. Whether the “color of the year” is a self-fulfilling prophecy or the trendsetters really are that on trend is currently unknown. Similarly, the mortgage industry has no shortage of trend predictions being made each month, quarter and year.

Unfortunately for lenders, these are never anything more than predictions as only time will tell how the markets will play out.

However, the mortgage industry is facing a shift in trend predictions this year, as experts unofficially name a “color of the year” in mortgage. Current buzzwords in the mortgage industry include affordable, underserved, accessible and equity. With the increasing regulatory focus on expanding affordable lending programs, mortgage lenders need to have a plan to serve the underserved.

Many lenders have historically shied away from offering a robust affordable lending product line, including down payment assistance (DPA) programs and ITIN mortgages. Surprisingly, risk isn’t the main factor affecting lenders’ appetite for DPA and affordable lending products today. What’s really holding lenders back are the challenges associated with DPA and affordable lending products.

Owning a house with the white picket fence may be a key part of the American dream, but lenders still need to make money in order to stay in business. At the end of the day, there must be a better balance between doing good for their communities and themselves at the same time.

Finding the ‘why’

The benefits of a lively and contemporary DPA and affordable lending program are far-reaching and untold, brightening the lives of many. However, those terms don’t always reflect well on a profit and loss statement, and many lenders need to define the benefits of offering these programs in terms other than pure numbers. While not the most altruistic motivation, meeting regulatory expectations is one advantage to offering DPA and affordable lending programs, as this would help align lenders with current federal-level directives to address the racial homeownership gap.

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Through DPA and affordable lending programs, lenders have an expanded ability to fulfill their desire to help low-to-moderate income borrowers obtain the goal of homeownership, but these programs also allow lenders to reach borrowers that may otherwise be ignored or rejected, which can be the key to success in a contracting market.

For some lenders, this could mean introducing new products, such as ITIN mortgages, aimed at providing homeownership opportunities to non-U.S. citizens with an ITIN, or individual tax identification number. As evidenced by these two examples, doing good while deriving value need not be mutually exclusive aims when it comes to offering DPA and other affordable lending programs.

Where the rubber meets the roadblock

For many lenders, the challenges of offering DPA and affordable lending programs have long outweighed the potential benefits. The most prevalent arguments against DPA and affordable lending programs are they’re hard to do and require an inordinate amount of resources, ultimately resulting in nearly no profit for the lender.

Additionally, state housing finance authorities are the primary sources of most DPA and affordable lending programs, resulting in 50 different programs and 50 different sets of guidelines. Those 50 different guidelines lead to confusion, errors, delayed closings and lock extensions, all of which cost the lender money.

While Ginnie Mae loan programs offer another avenue for lenders to offer loan programs geared towards low-to-moderate income borrowers, the onerous approval process to become an approved Ginnie Mae issuer make this strategy a non-starter for many lenders. Thus, lenders need to think beyond the obvious strategies and outlets if they truly want to add DPA and affordable lending programs to their product line-up.

Think outside the box

One emerging source for DPA and affordable lending products is the correspondent channel. Correspondent programs are often well suited to offer these programs because they can go deeper and wider in credit offerings than state programs while still fitting Fannie Mae and Freddie Mac requirements. Furthermore, correspondents are in a position to minimize overlays on DPA and affordable lending products, making them more efficient and more profitable.

One common misconception is that DPA and affordable lending products can only be used for low-income borrowers. With expanded credit offerings, these products can help a multitude of next gen borrowers. Loan originators need to fully understand their options and how to get creative within the programs in order to help their borrowers.

For example, some DPA programs are based off the area or state median income (AMI or SMI), not the borrower’s income. With a DPA program based off AMI and an informed loan originator, a recent pharmacy school graduate with a 620 FICO score and a salary of $128,000 could purchase their first home with a DPA program. Yet, a less informed loan originator could think this borrower is not eligible for any of the state-sponsored DPA programs due to their income and look no further.

The goals of expanding homeownership and closing the racial gap in homeownership have taken center stage in the mortgage industry of late. As affordable housing becomes the topic that defines and influences the industry this year, lenders will have to reevaluate their DPA and affordable lending programs and get creative.

Roland Weedon is president and CEO of Essex Mortgage.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Roland Weedon at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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