A mortgage program to better serve the next generation of borrowers
Fannie Mae, the largest single source of mortgage funding in the United States, recently took a big step toward recognizing that today’s homebuyers aren’t the same as in previous decades. Millennials are ready to buy their first homes, but they don’t have the savings their parents had and often want to live with roommates and friends, not a nuclear family. And as we move to a majority-minority population, households increasingly include multiple generations and incomes.
Fannie’s new affordable mortgage program, HomeReady, is designed for cash-poor, tech-savvy millennials and the growing minority population. There’s a lot to like about the new program, but we’d also like to see Fannie Mae release more data about these loans so researchers can track the progress of this program.
HomeReady replaces MyCommunityMortgage. Fannie Mae this month is replacing their longtime affordable credit product, MyCommunityMortgage, with HomeReady. Like its predecessor, the program allows borrowers to put as little as 3 percent down, but expands the option to all qualified borrowers, not just first-time homebuyers.
Why the change? Demographic trends identified in Fannie Mae’s HomeReady announcement include a rise in household formation and homeownership among millennials, increased racial and ethnic diversity from immigration, and a growing elderly population. Our recent paper, Headship and Homeownership: What Does the Future Hold?, confirms this demographic change and predicts that half of new homeowners between 2010 and 2030 will be Hispanic.
The mortgage market is set up to serve nuclear families, but millennial borrowers want flexibility in how they configure their households. HomeReady will allow lenders to consider income from accessory dwelling units, boarders, and other non-borrower household members. This feature along with low downpayments and access to quality information about homeownership is important for encouraging homeownership for Hispanics. For the first time, it also combines low downpayment and automatic underwriting with the ability to have non-occupant borrowers, such as parents.
These features will help extended families finance housing that is appropriate to their needs and could also help ease the rental housing crunch with more rental housing opportunities through accessory dwelling units and rented rooms.
Lower-credit borrowers may pay more. MyCommunityMortgage charged lenders a flat fee regardless of credit score and allowed borrowers to buy minimal mortgage insurance. HomeReady returns to risk-based pricing if borrowers want to take advantage of the low downpayment options offered, although it will be capped at twice the MyCommunity rate. Since 56 percent of households have subprime credit scores and 44 percent have less than three months of savings, many prospective HomeReady borrowers are likely to be paying the risk-based fees. Housing expert and former Fannie Mae executive Barry Zigas expects HomeReady pricing to be competitive since there are no volume limits and it is automatically incorporated into the automatic underwriting platform so it will be available to more lenders.
Potential tool for de-concentrating poverty. HomeReady is also aligned with the Supreme Court’s recent affirmation of efforts to de-concentrate poverty. HomeReady borrowers must make 80 percent or less of area median income, down from 100 percent (and an even greater share in certain high-cost markets) with MyCommunityMortgage. However, in the 20 percent of US census tracts designated high minority (over 30 percent minority and a median income less than the area median) or disaster-affected, borrowers may make up to 100 percent of AMI. And for the 31 percent of census tracts that are designated low-income census tracts (where the median income does not exceed 80 percent of the median income of the surrounding area), there is no income limit. Although HomeReady is expected to be just a small percentage of Fannie Mae’s overall portfolio, the impact of this program on minority homeownership rates will be something to watch.
Online counseling and underwriting. Framework, a comprehensive, interactive online homeownership education course, will be required for all borrowers, not just first-time homebuyers. The course can be complemented by traditional one-on-one counseling and borrowers will have access to post-purchase homeownership support for the life of the loan. This service will likely be very popular among households who saw the scams that flourished in the market crash and want to make sure they can afford their loan.
HomeReady is available through Fannie Mae’s automatic underwriting software, Desktop Underwriter. This means that options that once would have required special underwriting skill to originate will now be accessible to all lenders. This is a great improvement because many lenders are steering away from manual underwriting, due to fears of repurchase risk.
HomeReady is a mortgage access program for today’s homebuyer: tech-savvy and defining family in a way that the mortgage industry never has before.
Fannie Mae should go one step further, however, and make data on these loans’ recipients, pricing, and performance publicly available. This will allow researchers like the Urban Institute to answer important questions about which features of mortgage lending are needed to ensure sustainable homeownership opportunities for today’s low-income households.
Anita Alston poses in front of her new home in Lithonia, Ga., Friday, Dec. 9, 2005. (AP Photo/John Bazemore).