MassHousing loan program finds success
New offer cuts out mortgage insurance
Coming so soon after the real estate collapse, a new home mortgage with low rates, small down payment, and easy terms may sound either too good to be true, or a little too much like the reckless lending that contributed to the mess.
But the new mortgage product comes from an arm of the state government, MassHousing, which has a reputation for sober lending practices and sound finances. It features extremely low down payments - as low as 3 percent - and no mortgage insurance, which requires borrowers to pay hundreds of dollars a year in premiums if they do not have much equity in their homes.
“It’s really hit a chord,’’ said Thomas R. Gleason, executive director at MassHousing, which serves as the state’s affordable housing bank.
Rolled out in January, the new mortgage is so popular that loan volume at MassHousing has quadrupled so far this year compared with 2011. About 1,200 people have qualified for the new loan products this year, compared with about 300 borrowers through the same period last year, and loan volume is running at $29 million a week.
Mortgage insurance was developed to reimburse lenders when borrowers cannot make payments, and is usually required when owners have less than 20 percent equity in their homes. It allowed lenders to issue mortgages to those who could not afford a large down payment, and has been marketed as a key to increasing homeownership.
About 33 percent of all private and government-affiliated mortgages carry some form of mortgage insurance, according to industry specialists.
MassHousing said it has effectively eliminated the separate mortgage insurance on its loans by charging people a slightly higher interest rate and taking on a bit more risk.
For example, normally qualified borrowers would get a 30-year fixed-rate mortgage at 4 percent at today’s rate, with a down payment as low as 3 percent, and then pay extra for mortgage insurance. Under the new program, borrowers would pay slightly higher interest rates - 4.38 percent most recently - but that still works out to about $100 a month less than an insured loan with the premium rolled in.
The savings increase with the size of the loan, or if borrowers are refinancing mortgages from other lenders that have higher mortgage-insurance premiums, according to MassHousing.
Molly Ringler, 35, said she and her husband saved about $366 a month by refinancing their three-bedroom Scituate home through the MassHousing program.
“It’s huge for us,’’ said Ringler, who quit her job last year to take care of the couple’s baby while her husband continues to work as a heavy-equipment operator. “It saved us a big amount of money at a critical time.’’
Before this program, about 90 percent of MassHousing’s borrowers had some form of mortgage insurance, because so many had down payments below 20 percent. Now more than 80 percent are opting not to take out the insurance, the agency said.
The program is limited to households with incomes below 125 percent of the median for the area, which in Boston is about $120,000 a year.
MassHousing said the new mortgage is not as risky as it may look. Applicants still have to meet its lending standards: a minimum credit score of 680, debt-to-income ratio no higher than 41 percent, and full documentation of a borrower’s job status and income. First-time buyers must also undergo homeownership counseling.
The agency historically has a low delinquency rate among its borrowers, and MassHousing has further covered itself by partnering with mortgage giant Fannie Mae, which will effectively guarantee the loans after six months.
Gleason said that there is “nothing fancy or exotic about this program. You still have to have standards. It doesn’t mean you open the fire hose’’ and let loans “flood out.’’
Chris Herbert, research director at Harvard University’s Joint Center for Housing Studies, said the new terms do not appear particularly risky.
“MassHousing has a good track record of tough standards and low delinquency rates,’’ Herbert said. “As long as they stick to their standards, it’s really rather basic.’’
Fannie Mae, harshly criticized for its lending practices last decade, said it agreed to participate in the new program because of the tough documentation standards and a risk-sharing component. MassHousing initially underwrites loans that are issued by about 140 qualified mortgage lenders across the state. It then sells the mortgages as securities to Fannie Mae but guarantees the mortgages for the first six months; afterward, Fannie Mae guarantees them.
The program expires at the end of this year, and officials have not decided whether to extend it.
But William Mullin, president of NE Moves Mortgage LLC in Waltham, hopes they will. He said NE Moves issued 93 loans worth $23.4 million through the MassHousing program during the first quarter this year.
“It’s working extremely well,’’ said Mullin. “It’s very, very successful and popular.’’