Industry Insights: Prepping for a Sustainable Market in Affordable Lending
September 29, 2016
Many lenders feel they’re at a disadvantage compared to the larger mortgage originators when it comes to affordable lending. But you may actually possess a competitive edge in a market that appears to be re-emerging.
Not surprisingly, many lenders remain hesitant to pursue high LTV lending because of lingering fears over financial risks or regulatory fines. Yet with favorable economic signs emerging, as well as new mortgage products and tools being launched, the affordable landscape is becoming more attractive – and more sustainable – for those willing to engage this sector.
The Affordable Climate
Prior to the 2008 housing crisis, many lenders participated in the "affordable lending ecosystem." That is, they formed mutually beneficial networks of housing professionals to help low- and moderate-income consumers become homeowners.
"When the focus shifted toward foreclosure prevention and neighborhood stabilization, a lot of those interactions were set aside," recalls Danny Gardner, Freddie Mac's Vice President of Single-Family Affordable Lending & Access to Credit. But today, he believes, a revitalized ecosystem can once again help stimulate responsible homebuying in the affordable market.
So, what factors are creating a more optimistic picture of the affordable market? According to housing information provider CoreLogic, monthly foreclosures have declined from a peak of 117,835 in September 2010 to 38,000 in June 2016, allowing many housing professionals to turn their attention back to new home loans.
At the same time, changes in demographics are opening new affordable homebuying opportunities. Nationally, several demographic groups such as Hispanics are poised to enter homeownership in significant numbers in the near future.
Community Lending at its Best
As the affordable lending market grows, why are local lenders particularly well-positioned to grow the pool of potential homebuyers? The answer lies in the very nature of being "local," explains Phil Guth, Freddie Mac Vice President of Business Development, Single-Family Sales & Relationship Management.
"Community lenders are more likely to know and understand the borrowers in their community," he says. In the more specific case of community banks and credit unions, he adds, prospective borrowers often have a "total banking relationship that may not occur with larger banks."
As a result, local lenders are able to consider both the person and the application. Armed with such knowledge, Guth believes, they sometimes are willing to make a loan that a larger institution might consider to be marginal.
In fact, local lenders may find that some community members haven't yet realized that they can afford a home. To meet this challenge, lenders like Central National Bank in Junction City, KS teams up with local real estate professionals to educate civic and non-profit groups, employers, title companies and so on. Some of these organizations then join with Central National to educate others.
Tina Barker, Vice President of Mortgage Banking for Central National Bank, a Freddie Mac Seller/Servicer that serves the Midwest, has found that Central National's role as a "hometown bank" helps her team to reach and educate a growing mortgage customer base. "Folks are looking for local folks who can be their trusted advisors," she says. "We can do the handholding and explain how this works."
Another challenge in communities across the country is the limited supply of affordable housing. "Investors are purchasing as quickly as they can," Barker reports of her area, "and this is limiting opportunities for low-income consumers." Local professionals teaming up in the affordable ecosystem may help these consumers win a home contract.
Cultivating an affordable lending ecosystem means identifying like-minded professionals. In addition to local builders, real estate professionals, attorneys, appraisers and home inspectors, the affordable lending ecosystem also includes:
- Housing counselors who guide consumers through the mortgage application process. Without such help, Freddie Mac's Gardner believes, efforts to obtain a mortgage loan "can be very demoralizing and disheartening" and may cause some potential homebuyers to stop their home search.
- Non-profits, such as the assistance platforms Hope LoanPort® and eHome America, which help ecosystem members reach underserved communities.
- Federal, municipal and county government agencies tasked with affordable housing assistance.
Freddie Mac, too, has shifted some of its resources from a foreclosure-prevention focus back to affordable lending. "We want to act as a catalyst for growth of the affordable market," Gardner says. Here are links to key tools designed to achieve this goal: