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3 Intriguing Details About Today’s Mortgage Environment

by Peter Thomas Ricci

The mortgage markets may have undergone a radical change since 2008, but some details may still surprise you.

Last week, we reported a rather sobering statistic – according to record keeping by Ellie Mae, the average FICO score for accepted loans was 729 in March, which is just a 3 percent decline from where FICO scores were a year ago; in short, lending standards have barely budged in the last year.

Still, this being the mortgage business for the world’s largest housing market, there are some very intriguing details to how mortgages work nowadays, some of which cut through the whole “lending is tough” mantra. Here are three such details to consider:

1. Lower Downpayments are Returning – As the Wall Street Journal‘s Nick Timiraos pointed out, low downpayments never technically went away (the FHA has always been around with its 3.5 percent requirement), but even on the conventional side, lower downpayments in the 5 and 10 percent range are becoming more prominent. In 2013, for example, the share of loans with downpayments of less than 10 percent hit their highest level in five years.

One important thing to keep in mind – those lower downpayments still come with conditions, especially in the form of private mortgage insurance. Though Fannie Mae and Freddie Mac will insure loans with downpayments as low as 5 percent, they’ll only do so when the loans are properly insured; so although low downpayments may be available to your clients, they better brush up on their PMI lingo to qualify.

2. Return of No-Money-Down Mortgages? – Again, Timiraos points out that, via the lending programs from the Veterans Administration, the U.S. Department of Agriculture (for specific rural areas) and the Navy Federal Credit Union, the no-money-down mortgage did not completely go away with the 2008 market crash, but even outside of those august institutions, homebuyers can still utilize downpayments gifts from family, employers or state agencies to achieve a “no-money-down” situation.

3. No Need to Worry, Though – Sure, mortgages with little-to-no downpayments were prime culprits for the housing downturn, but the lending products we just described have zero similarities to the poorly designed (aka, stupid) mortgages that swamped the market during the bubble years, a la risky adjustable-rate mortgages with teaser rates and NINA loans.

Also, the long-awaited qualified mortgage standards, which finally took effect at the start of 2014 after years of nitpicking and refining, will make it more difficult for those mortgages to return, and in two distinct ways: first, the borrower’s ability to repay is a huge requirement for meeting qualified mortgage standards, and lenders face vicious penalties for not verifying that ability; and two, transparency and simplicity are the main guidelines for mortgages nowadays, and because of that, it’s more likely that we’ll see less mortgages in the coming months, rather than more. According to Timiraos, J.P. Morgan Chase & Co will offer 15 mortgage products by the end of 2014, down from 37 in 2013.

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