Low and Moderate Income Borrowers Are a Source to Look for Increased Originations, Investments

Borrowers

Federal programs can reduce lender and investor risk on affordable housing loans.

Originators looking for loan leads, and investors looking for mortgages that can be used to expand secondary market pools, should be looking to the low- and moderate-income area as an underserved area they may be able to mine successfully for increased volumes.

An analysis of 2014 lending (via the LendingPatterns Home Mortgage Disclosure Act database of ComplianceTech, Alexandria, VA) shows that low-mod borrowers (those at or below 80 percent of area median income) got just more than one in eight of mortgage dollars requested. But LMI borrowers applied for one in four mortgages requested.

For 2014, LMI mortgage dollars came to about $340 billion.

The potential low-mod borrower cohort is potentially quite high. The Kansas City Fed, in a 2013 survey, pointed out that with LMI traditionally defined as 80 percent or less of area median income, that would mean up to 40 percent of total families was LMI.

“The LMI category roughly corresponds to individuals and families in the bottom two quintiles of the nation’s income distribution (the lowest 40 percent). In 2011, families in the bottom two quintiles were those earning $48,000 or less. More than 30 million of the 78.6 million families nationwide in 2011 were classified as LMI under this definition.2 The family income threshold for LMI status varies significantly across the United States, from $32,181 in Mississippi to $54,041 in Maryland.”

Of course, LMI borrowers often face credit challenges. “Many LMI families and individuals lack access to traditional forms of credit, such as bank loans and credit cards. According to LMI Survey respondents, the LMI population has had even greater difficulty accessing credit, as credit standards have tightened considerably since the financial crisis,” according to the Fed survey.

Still, some percentage of LMI borrowers are ready for mortgages now. Lenders may think that LMI borrowers are riskier than high-income ones. But there are a variety of programs that help lenders with risk.

The biggest ones are the federal insurance provided by the Federal Housing Administration and the Department of Veterans Affairs. And those mortgages are routinely packaged into Ginnie Mae securities.

You’d expect that FHA and VA lending, intended for low-mod and first-time borrowers, would have higher LMI percentages, and they do, FHA more so than VA.

According to the LendingPatterns data, LMI originations of FHA and VA loans made up 19 percent of total FHA/VA originations for the year of more than $250 billion.

FHA mortgage dollars went to low-mod borrowers at a rate of 26 percent during 2014.

On the VA side, affordable housing numbers were lower, at 17 percent of numbers of mortgages originated and just 11 percent of dollars originated. That makes VA lending the sweet spot for finding those safe extra LMI originations.

The Fed study noted that federal programs designed to support housing, both ownership and rental housing, and single- and multi-family, have had some success in helping LMI families.

The Affordable Housing Program of the Federal Home Loan Bank System is a good example of this. When Congress reorganized the mortgage industry after the savings and loan scandal of the 1980s, it mandated that the 12 district Federal Home Loan Banks use a portion of their profits to fund affordable housing programs.

Housing projects, both single- and multi-family, are sponsored by members of one of the district banks and awarded by the FHLBs. Typically the money is not enough to fund a whole project but can be used as gap funding to be added to other sources of funding. Affordable housing projects tend to have many different financing sources, which makes them hard to be used as templates for other projects, including the Department of Housing and Urban Development’s HOME effort.

An example of an AHP project is Cornerstone Townhomes in Niagara Falls, NY. This project was awarded $500,000 by the Federal Home Loan Bank of New York last December. The developer is Niagara Falls Housing Authority, and the lender sponsor M&T Bank.

The Low Income Housing Tax Credit is a multifamily production program with a complicated delivery mechanism but effective results, to the tune of about 100,000 low income units funded per year. That’s nearly three million units since program inception back in 1987.

The LIHTC is a tax credit, so it is regulated by the Internal Revenue Service, but administered by home finance agencies (HFAs) in the various states. Funding is per capita by each state’s populations. Developers put together proposals that get awarded through a points system. Then the tax credits are sold to investors that can use tax relief through syndication firms. Investors are actually buying equity in the projects.

Some states have their own LIHTC programs. New York’s is modeled after the federal one, with some exceptions: it can serve residents at up to 90 percent of area median, the credit is not specific to calendar years, and the credits offset state taxes rather than federal.

Some specialized areas of lending to low income borrowers have very little risk to investors. HUD has two loan programs to facilitate housing to American Indian tribes. The HUD 184 program, for instances, guarantees 100 percent of a financial institution’s loan to an individual Indian, the tribe’s TDHE (tribally designated housing entity) or the tribe itself.

HUD 184s are eligible for Ginnie Mae pools, which means they support both the originations side and the investor side of the mortgage industry. While definitely a small niche, the program has made almost $5 billion in loans to date.

HUD’s Title VI program, which is basically project loans to be used for construction or infrastructure on the projects, guarantees 95 percent of a lender’s outlay.

Tribal housing projects especially tend to have an impressive number of sources of funds. One that I covered had ten separate financial institutions involved. But its success was remarkable: 250 homes constructed and financed in a remote part of the Arizona desert.

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Mark Fogarty

Mark Fogarty

Mark Fogarty, a former editor of National Mortgage News, has covered and analyzed mortgage finance for more than 30 years and has chaired more than 75 meetings in the mortgage industry.

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