You Don’t Need to Be Perfect to Get a U.S. Loan Anymore

Bank of America Corp., the third-largest U.S. mortgage lender, refused to give Paul Mataska the loan amount he needed last year after he had a six-month layoff from his job in 2012. That setback didn’t prevent a Canadian lender from providing the electrician the loan this year.

The U.S. unit of Toronto-Dominion Bank approved a mortgage for Mataska through its new program with flexible income and low down payment requirements. He’s scheduled to close on his $269,000, three-bedroom bungalow in Bayville, New York, this week.

“I got lucky with TD -- there was no primary insurance I had to pay, rates were lower and it was a lower percentage down,” Mataska, 33, said.

Borrowers like Mataska with minor imperfections on their applications, such as a brief loss of employment or a temporary drop in a credit score, have mostly been turned away by lenders since the 2008 housing crash. That’s starting to change, with at least 15 smaller firms this year offering slightly riskier mortgages, sometimes at higher interest rates or requiring larger down payments, that aren’t backed by the government. The mortgages are being held on balance sheets or sold to investment funds as the securitization market has been slow to recover.

“Some lenders became afraid of their own shadows,” said RPM Mortgage Inc. Chief Executive Officer Rob Hirt, who in August started programs for borrowers with higher debt burdens or those who had sold a home for less than the outstanding mortgage. “The market is beginning to realize that if you make smart and sound loans to people who don’t fit in the narrow box, it doesn’t make them a worse risk.”

Among those providing loans for borrowers who would otherwise struggle to find financing are Angel Oak Home Loans, Lone Star Funds’ Caliber Home Loans Inc. and Banc of California Inc. The volume of the lending is low, totaling less than 1 percent of the $1 trillion mortgage market.

Tough Standards

Lenders including Bank of America and JPMorgan Chase & Co. have maintained high credit standards, often above the guidelines from Fannie Mae, Freddie Mac and the Federal Housing Administration. Though government-controlled Fannie Mae and Freddie Mac will buy loans to borrowers with FICO credit scores as low as 620, the average score on mortgages they purchased is now about 740, well above the 660 level often considered subprime.

Established lenders are reluctant to ease their rules out of concern that Fannie Mae, Freddie Mac and FHA will force them to buy back bad loans with underwriting errors. Banks also don’t want to take risks on loans that government programs won’t insure. Lenders suffered more than $200 billion of losses on home loans on their books from 2006 through 2012, according to Moody’s Analytics data, along with legal settlements and lawsuits.

That caution has created opportunities. Shellpoint Partners LLC’s New Penn unit, the lender backed by mortgage-bond pioneer Lewis Ranieri, in August began offering mortgages for home buyers with debt-to-income ratios up to 55 percent and interest-only loans when borrowers have “high disposable income” or “high income potential due to their line of work.” Caliber said in June its new programs would offer new flexibility for foreign nationals or on purchases of condos without approval for government programs.

A Mortgage Bankers Association measure of credit availability has shown a 4.7 percent loosening this year. The gauge indicates credit is still almost 90 percent tighter than in the housing bubble that ended in 2006. A Fannie Mae lender survey released in September found 25 percent eased guidelines in the last three months for mortgages not eligible for sale to the firm or Freddie Mac, and 14 percent expected to do so in the next three months.

Laid Off

The TD Bank unit’s Right Step program, which was relaunched in April, lets borrowers put 3 percent down and forgo mortgage insurance if they have credit scores of 660 or above.

Mataska, an electrician, said he was temporarily laid off in 2012 from a company where he has worked for eight years. With his diminished income, he said, Bank of America offered him a loan of $204,000, which wasn’t big enough. Mataska said at the time his credit score was about 740.

Terry Francisco, a spokesman for Bank of America, declined to comment on an individual borrower’s situation.

The U.S. unit gave Mataska, who is in the third year of a five-year electrical apprenticeship program, a 30-year fixed loan for $249,000 at 3.9 percent. Fannie Mae and Freddie Mac wouldn’t buy the loan because of Mataska’s debt relative to income.

“Owning a home means more permanence,” said Mataska, who has moved when his rent increased to lower his costs and stay in his son’s school district.

Common Sense

Banc of California provides mortgages for borrowers with a record of foreclosures, late payments or other dings on credit scores when they make a down payment of at least 20 percent and show other sources of strength, said Chief Lending Officer Jeff Seabold. The bank charges about two percentage points more for these loans than it does on its standard mortgages, he said. The Irvine, California-based firm has made about $150 million of what it internally calls “second-chance” mortgages since starting the program about 14 months ago.

“To us, it’s common sense,” Seabold said. “There’s quite a few people who are boxed out that shouldn’t be.”

Samantha and Eric Sieverling, after each were laid off, let their condo in Lynnwood, Washington, go into foreclosure in 2012, in part because they faced a one-time building plumbing charge of about $10,000. They bought the property for $220,000 in early 2009 with prices “on the downslope but the ride kept going a lot further down,” said Eric, 49, a software engineer.

“I was devastated,” said Samantha, 49, a technology project manager. “You can’t just walk away from a home, that’s not the way it works in America.”

Scores Drop

Samantha and Eric both found new jobs and moved into a rental in Seattle and saw their monthly payments rise to $1,900 from $1,500 over two years. Eager to avoid further increases or moving to a smaller place, they began looking to buy another home. They found a Banc of California loan officer online who was willing to work with them, even after their credits scores had fallen to the low 600s following their foreclosure.

Samantha cashed in one of her retirement accounts to make a 20 percent down payment. The bank gave the couple a mortgage at 6 percent for a 1,400-square foot two-bedroom apartment for $185,000 that they bought in March. A stream, Thornton Creek, runs through the grounds of the complex.

They can afford the mortgage and condo association payments, about $1,300, with less than one of her two monthly paychecks. Eric’s income provides an even bigger cushion.

“This is not stretching us at all,” she said. “We are saving on the order of about $500 a month, compared to the rental.”

Returns Fall

The origination of non-agency mortgages to borrowers like the Sieverlings will remain small until they are securitized and investors regain their appetite for risk after the subprime meltdown in 2008, said Vitaliy Liberman, a portfolio manager at DoubleLine Capital LP, which is looking to invest in mortgages that don’t meet regulatory guidelines. Wall Street has been willing to buy and bundle into securities only high quality mortgages on expensive homes, known as jumbos.

The Federal Reserve’s stockpiling of bonds and cap on one of its rate benchmarks near zero has pushed yields across markets down and forced banks and investors to hunt for opportunities. Bonds backed by boom-era non-agency loans that traded at discount prices two years ago and returned more than 10 percent annually now offer about 5 percent.

“The dilemma is how do you deploy capital and capture the returns” of the last few years, said Liberman.

Lenders made $35.2 billion of so-called higher-priced mortgages, which generally means the loans have greater risks, in 2013. That compares with $15.8 billion in 2012, according to an Inside Mortgage Finance analysis of federal data released last month. The total, while a third straight annual increase, compares with $1.8 trillion of total originations last year.

Investors Buying

Banc of California, which holds its expanded-criteria loans on its books, has begun to find buyers on Wall Street, said Seabold, declining to name them.

RPM Mortgage is working with an investor that can hold about $2 billion of its new loans until they’re potentially securitized, CEO Hirt said, declining to disclose the funder. Billionaire John Grayken’s Lone Star Funds is seeking to raise a $1 billion fund to invest in debt tied to the riskier mortgages originated by its Caliber Home Loans, according to a marketing document.

Family Tragedy

Dave Armistead, 35, and his wife, Andrea, are among the lucky few to get a mortgage after a family tragedy led to a financial one in Georgia.

Dave, a high school teacher, said they had clean borrowing records -- credit scores well above 700 -- until his wife, a registered nurse, stopped working following the death of their eight-day-old daughter from heart failure in 2009. As their earnings fell, making mortgage payments a strain, the U.S. housing market crashed.

With their loan size greater than the value of a property in need of repair and with mold in the basement, the Armisteads stopped making payments and were foreclosed upon almost three years ago. They became renters.

Hoping to buy another home before prices rose too much, Dave, whose credit score had fallen to about 660, got a mortgage from Atlanta-based Angel Oak Home Loans to buy a four-bedroom house for $260,000 in Woodstock, Georgia, with 20 percent down. With Andrea, 39, working again, the couple have payments that equal about a quarter of their gross income.

The loan has an 8.99 percent interest rate, compared with conventional rates that are now about 4 percent. Dave said he plans to refinance into a cheaper loan in about a year after repairing his credit score.

Surprise Ending

The family -- two boys and a new baby girl -- settled into their new home before school started. Last week, Dave was teaching his students about Eli Whitney, the American inventor.

“We felt we were going to get priced out of this section of the neighborhood if we had to wait another year,” he said. “A lot of things kind of came together for us.”

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