There are enough real barriers to buying a home without adding ones that come from misperceptions about the rules of the secondary market. To solve this problem, efforts are being made to distinguish the real barriers from the myths.
FOR MANY INDIVIDUALS AND FAMILIES, getting approved for a mortgage leads directly to the realization of a lifelong dream. But there are many compelling stories of individuals and families--with unique financial circumstances--whose quest for a mortgage follows a road with unexpected detours.
Envision a young couple who wants to buy an older rowhouse in a Northeastern inner-city neighborhood, next door to a "mom-n-pop" convenience store. They earn more than enough money to cover the mortgage payment comfortably, have a healthy down payment and good credit history.
Think about the young, single mother of two who has shared rent and living expenses with her cousin for several years. Now they wish to pool their savings to purchase a home of their own.
Then there's the young man, who must work several jobs to pay the rent on the four-bedroom apartment he needs to house his extended family. He finds a spacious home that would cost less than the high rent he's been paying for years, but the mortgage payment for the house he's chosen would exceed 33 percent of his income.
Too often these borrowers see their mortgage applications denied or in other instances are discouraged from applying at all. Sometimes lenders say the reason for turning down the application is that the loan can't be sold into the secondary market. But this can be a misperception on the part of the lender.
In fact, Freddie Mac is willing and eager to purchase many of these mortgages; its current lending guidelines include the flexibility to recognize credit-worthy borrowers who have already demonstrated their commitment and ability to sustain and maintain housing debt obligations.
A new Freddie Mac announcement, which at press time was expected by early this month, will come as good news to some lenders who are unaware of the corporation's flexibility.
The safe road
Many leaders who sell to multiple investors develop their own underwriting guidelines to incorporate the most conservative features of each, believing this is the "safe road." For these lenders, Freddie Mac's message is that they are following policies that make it inordinately difficult or more expensive for some creditworthy Americans to buy a home.
"Lenders tend to hide behind |the secondary market~ guidelines by politely quoting whichever takes the most conservative position on an issue," observed Ernest Clark, an Oakland, California, real estate broker who represented the National Association of Real Estate Brokers during one of Freddie Mac's work groups.
In clarifying its guidelines further, Freddie Mac's goal is to identify and eliminate barriers that prevent credit-worthy borrowers from being approved for mortgages and to clarify and/or change guidelines that limit access without good business reasons. Freddie Mac is seeking to achieve this goal by working hand-in-hand with lenders, appraisers and real estate professionals to overcome preconceived notions and unfounded fears that directly or indirectly create barriers to access.
A rigid approach
A rigid approach to underwriting, which developed unintentionally in the business as a result of a "one-size-fits-all" method to improve the efficiency of pipeline management and sales execution, can have the unintended effect of denying qualified borrowers. Not all creditworthy borrowers fit the traditional mold. Many "nontraditional" borrowers are often good credit risks.
On the other hand, there are valid business issues that create disincentives for lenders who would like to heed Freddie Mac's message of flexibility and judgment.