Mortgages after the meltdown

<i>With industry overhaul, a new map for lending emerges in NYC real estate</i>

Ever since “subprime loan” became a household phrase, mortgages have been a hot-button topic in a country rocked by the credit crisis and real estate downturn. That’s especially true right now. As The Real Deal was going to press, sweeping financial reform appeared to be in the final stages of becoming law in Washington, D.C.

If passed, the legislation would create a Consumer Financial Protection Bureau intended to prevent unfair practices in consumer mortgages. The bill would also ban no-income loans, force lenders to ensure that borrowers have the ability to repay loans, and attempt to make the compensation of mortgage brokers and loan officers more transparent.

While some of these reforms are being hailed by mortgage professionals, others worry that the new regulations will create added costs for consumers. In the meantime, they’re trying to survive in an industry already undergoing drastic change.

For example, new rules went into effect in January governing the “good faith estimates” that lenders issue to mortgage applicants. The changes are meant to make the mortgage process more transparent for consumers, and to eliminate the unexpected fees that commonly popped up at the closing table during the boom. But mortgage professionals say the new, complicated GFE process is slowing down deals just as the market is starting to rebound. And while the new regulations are intended to save consumers money, they’re actually costing them more — at least in the short term — industry experts say.

Meanwhile, with subprime loans now largely gone from the marketplace, some say some unscrupulous brokers are pushing consumers toward loans backed by the Federal Housing Administration, which are more expensive than conventional loans. (It remains to be seen how much the new financial regulations, if passed, would impact this.)

Despite these challenges, industry professionals have found ways to help make the mortgage process smoother for qualified consumers. Since the beginning of the downturn, mortgage giant Fannie Mae has required the builders of new condos to sell 51 to 70 percent of their units before the agency would back loans in their projects. For a time, that made it nearly impossible for buyers to get mortgages from traditional lenders in those buildings, slowing down sales. But at long last, developers are finding a way out of that bind by receiving special approval from Fannie Mae to split their projects into different sections, or phases. And even some conventional lenders have started to ease their own requirements for issuing mortgages to buyers in new condos in the city. Brokers and mortgage bankers say that while 51 percent sold is still the gold standard, more and more lenders are willing to loan to buyers in buildings where as little as 25 or 30 percent — and in some cases even less — of the units are sold.

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And, construction lenders are also getting in on the action. Before the financial crisis, the banks that did construction loans for developers generally stayed away from giving consumer mortgages in the projects they built, so as to avoid overexposure in those buildings. Now, some construction lenders — at least those with consumer banking divisions — are changing their tune, often helping developers by providing loans for their buyers even if the building hasn’t yet met Fannie Mae’s presale requirements.

For more on navigating the world of lending, check out the following stories:

Divide and conquer

Grappling with ‘good faith’

The truth about FHA

This end up

A new holy grail for loans