Zigas and Associates LLC helps organizations develop sound strategies, build effective leadership, and create innovation that produces results. Zigas and Associates LLC works with both for profit and nonprofit organizations. The firm brings to its engagements a robust understanding of organizational growth and development; a deep expertise in how policy and practice interact to create effective results; a passionate commitment to effective strategies that improve peoples’ lives; and a practical, market oriented approach to social ventures. Read more >>
With more than 30 years of leadership in diverse roles in housing, community and economic development, Barry Zigas has a unique blend of for-profit and nonprofit experience. This includes leading organizations and workgroups ranging from more than 200 national and regional staff members as a Senior Vice President at Fannie Mae to leadership of the National Low Income Housing Coalition, with 16 staff. He has effectively articulated and promoted innovative public policy solutions to pressing social concerns. Read more >>
Fannie Mae last week announced a significant new product, HomeReadyTM, designed to expand the company’s ability to provide financing for low and moderate income borrowers. HomeReady builds on the company’s historical family of low-down payment mortgage products with flexible underwriting features, starting with Community Home BuyersTM in 1993 and continuing through the My Community Mortgage® product. It is available to borrowers with incomes at or below 80 percent of their Area Median Income (AMI) or borrowers of any income living in designated Census tracts.
The product adds underwriting flexibilities and caps risk-based fees for loans above 80 percent LTV with borrower credit scores of 680 at 150 basis points, less than for similar non-HomeReady loans. It also requires only 25 percent MI cover on HomeReady loans with LTV’s above 90 percent. These should make Fannie Mae mortgages more competitive for the targeted low wealth and LMI borrowers and enable lenders to make more loans to these borrowers with a secondary market execution.
But the really game-changing features of HomeReady are its adoption of a standardized consumer education requirement and the incorporation of the product into Fannie Mae’s Desktop Underwriter® (DU) automated underwriting system while offering unlimited lender access to the product. With the first Fannie Mae has established a new standard that will affect the entire housing education and counseling industry. With the second it has broken a long-standing tradition of offering HomeReady’s antecedents in only limited quantities as part of individual lender contracts. By promising that DU® will flag loans that qualify for HomeReady even if the lender does not specify them as such, and by offering them without volume limits, Fannie Mae has brought a flexible low down payment loan into its mainstream business in an unprecedented way.
Fannie has been a supporter of homeownership education and counseling since the beginning of its community lending business in the early 1990’s. Both Community Home Buyer and My Community Mortgage required borrowers to certify they had received housing counseling (although this requirement was briefly suspended for MCM in the mid-2000’s). While at first this requirement could only be fulfilled through a HUD-certified counseling agency, years of pressure from lenders and mortgage insurers led Fannie to broaden the requirement to permit these other actors and other methods in the mortgage process to provide it. Given the self-interested nature of these players, and the increasing pressure to increase the velocity and efficiency of mortgage originations, these products’ counseling requirement became less standardized and, according to some, less comprehensive and meaningful at the products aged.
HomeReady requires that the borrower complete an on-line homeownership education course offered through a platform called Framework®. It requires borrowers to complete the course and to foot a $75 fee for it. While Fannie is encouraging consumers to also consult certified housing counselors (who would receive 20 percent of the fee if they refer a borrower to Framework) this will not be required. Framework is sponsored by the Housing Partnership Network (HPN) and the Minnesota Homeownership Center and meets the requirements of the HUD Housing Counseling Program and the National Industry Standards for Homeownership Education and Counseling.
By picking one platform that is accessible to any consumer with online access in order to obtain HomeReady’s flexibilities and pricing, Fannie has reset the table for the future of homeownership education and counseling. Fannie has neatly cut through a decades-long debate about how to incorporate education into the loan process by adopting it. The education and counseling industry will have to adjust to this standard now. Efforts to further refine or expand the use of classroom or face to face counseling will have to start with the premise that targeted consumers will use the Framework curriculum and certification.
The announced availability of HomeReady through DU without contract limits is a huge paradigm shift. If the product actually succeeds in qualifying more LMI borrowers it means its growth will be hindered only by effective demand, while MCM and Community Home Buyer were constrained by budgeted supply.
If the biggest story in mortgage underwriting in the late 1990’s and early 2000’s was the introduction and widespread adoption of automated underwriting, one of the biggest in 2015 will be Fannie’s decision to make their new HomeReady product available on the platform. MCM was offered only through manual underwriting until 2006. This required lenders to pull these loans out of their newly developed default business processes, which slowed its adoption. Moreover, lenders only could access it through individual contract provisions and for fixed amounts specified in them. As described in last week’s announcement, this is not the case with HomeReady.
Enabling DU to flag loans that are eligible for HomeReady is another accelerant that should increase its market penetration. Rather than manually assess a loan’s eligibility for the increased flexibilities, lenders should be able to run all loans through DU and get a recommendation from the system if a loan qualifies. This removes another process barrier for lenders and should increase consumer access to the product compared to a non-DU execution, or one that requires the lender to flag the loan as HomeReady eligible.
Lenders will be able to commingle HomeReady and other loans in MBS pools and whole loan commitments, another feature that should make using the product easier and more seamless for lenders.
The HomeReady product adopts a number of underwriting flexibilities that are designed to increase credit access for LMI borrowers.
• Non borrower income will be included in calculating debt to income ratios up from the default limit of 45 percent to as high as 50 percent, which should increase such households’ buying power. Fannie Mae states in its product materials that its research shows such income is “sticky” and persistent, and as stable as income that does not include such sources.
• Allows non occupant borrowers, and rental payments, such as from a basement apartment, and boarder income can augment the borrower’s qualifying income
• Lower mortgage insurance requirements, though these weren’t specified in the announcement
• Use of nontraditional credit
• Allowing gifts, grants, Community Seconds® and cash-on-hand to be used for down payments
• Allowing manufactured homes and HomeStyle® renovation loans up to 95 percent LTV
Freddie Mac has not announced a comparable product yet. But historically, Freddie has followed Fannie Mae in such initiatives after some period of time.
Fannie’s announcement promises further details through the rest of the year and expects to go live with the product on DU and accept HomeReady loan deliveries late in 2015.