New Mortgage Regs Tighten Bank Belts | Lenders see return to a more conservative time
As the pool of homes for sale deepens, the pool of qualified buyers dries up and local bankers say strict new underwriting guidelines from private mortgage insurance companies have exacerbated the situation.
Some bankers say private mortgage insurance companies âhave turned radical.â The new, stricter underwriting guidelines mean banks that were conservative during the freewheeling housing market of the last five years, and qualified, low-risk homebuyers are nevertheless paying for the good times with declining mortgage writing business and their aspirations for homeownership.
Still, bank mortgage executives agree that the stricter guidelines are necessary to bring stability back to the home finance market, even if it does mean writing fewer loans.
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Mortgage insurance policies protect lenders, primarily banks, against losses should a borrower default on a loan.
On May 5, mortgage insurance provider Genworth Financial put limitations on the loans it would cover in so-called âdeclining/distressed marketsâ like Worcester. The restrictions were in response to declining real estate values, and require borrowers to put at least 10 percent down on the purchase of property and have a minimum credit score of 680. Ineligible loans in these so-called âdistressed markets,â according to Genworth, include: adjustable rate loans with a first adjustment less than five years, investment property loans, cash-out refinance loans, nontraditional credit loans and construction permanent financing loans.
MGIC, the Mortgage Guaranty Insurance Corp., introduced ârestricted markets parametersâ June 1. Worcester County, along with six other Massachusetts counties, is one of MGIC's restricted markets. MGIC's new restrictions are similar to Genworth's, but MGIC will allow a borrower to put as little as 5 percent down on a loan as long as the loan amount doesn't exceed $417,000, the borrower's credit score is at least 680 and the loan is fully documented.
Mortgage insurers are also requiring debt-to-income ratios of 45 percent for most loans rather than the 55 or even 60 percent allowed at the peak of the residential real estate boom.
Instead of â40 mortgage applications in front of you like we used to have, we might have 10â currently, said Mark E. LaMountain, vice president and mortgage loan officer at Commonwealth National Bank in Worcester.
âI feel for kids today wanting to buy a house,â LaMountain said. âIt's the good guys today paying for all the crap over the last five to seven years, and banks are being challenged. We ask (borrowers) to have patience.â
Despite the challenges, LaMountain said stricter underwriting is good for the industry.
Return To Reason
Mark O'Connell, president and CEO of Avidia Bank of Hudson, said the private mortgage insurance industry âis getting back to normal, more reasonable underwriting.â
He said that may be a problem for people who got their first mortgages under the lax standards that prevailed during the last five years, when banks could write loans like mortgage companies, without mortgage insurance.
âBut for a legit first-time buyer, this could be an opportune time,â he said.
Jeffrey R. Guimond, senior vice president of retail lending and loan operations at Benjamin Franklin Bank, said banks can negotiate with mortgage insurers on behalf of customers that may not meet all the new requirements, but âcompensating factors,â like significant investments or savings.
Even then, âWorcester is a really tough area with relation to decline,â he said.
He said banks are having a hard time getting private mortgage insurance on loans to borrowers with credit scores of 700 and putting 10 percent down.
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