Lenders Take Aim at Minority Buyers

With three out of every five first-time homebuyers expected to be racial and ethnic minorities over the remainder of the decade, major suppliers of mortgage money are rolling out new products at a rapid pace so lenders can meet their borrowers' needs.

Freddie Mac is eliminating a rule that requires borrowers to be U.S. citizens and is offering an improved version of the old lease-purchase program. Meanwhile, Fannie Mae is in the market with an interest-only loan that can save a buyer with a $150,000 mortgage almost $100 a month.

"We're entering an era of mass customization to meet the needs of underserved markets," Fannie Mae Chairman Franklin Raines said at the National Association of Home Builders' annual convention here last week.

"There will be a lot of ways to reach this new constituency," added Craig Nickerson, vice president of Community Lending at Freddie Mac.

Freddie Mac and Fannie Mae don't loan money directly to consumers. Rather, the two federally-chartered financial institutions keep the funds flowing by purchasing mortgages made by local lenders and packaging them into securities that are sold to investors worldwide.

Nickerson told the convention that nearly 60 percent of all first-time buyers between now and 2010 will be young minorities and immigrants.

Nearly 80,000 builders and allied professionals attended the huge event, which spilled out into the parking lots of the World Congress Center at the top of International Boulevard.

Hispanic and Asian households will account for the largest share of the growth, according to Nickerson, as 27 percent of total household growth in the decade will come from immigration. Most of the Hispanics are expected to come from Mexico.

To reach permanent and non-resident aliens, Freddie Mac no longer demands that borrowers be American citizens. Now, anyone who is a lawful resident of this country is eligible for a mortgage.

In addition, geographic restrictions on owner-occupied, one- and two-family units have been removed. "We're changing our underwriting across the board, not just in certain areas," Nickerson said.

Freddie Mac will also now lend up to 105 percent of the value of the property, accept cash-on-hand (sometimes known as "mattress money") as a source of funds and allow borrowers to use money from boarders as part of the income needed to qualify for the mortgage.

For credit-impaired borrowers with little or no cash, the company is improving on the old lease-purchase scheme by giving homebuyers full credit for the monthly payments and allowing them to reap all the benefit of appreciation.

Freddie's 21st Century Lease Purchase program is both a credit and a down payment solution, Nickerson said. "No down payment is required, ever," he said. "And it helps borrowers who have serious credit issues or no credit standing whatsoever."

Under the program, a non-profit organization buys the house and leases it to the future owner at a rent that's close to the agency's mortgage payment. Then, after three years, the tenant assumes the mortgage as a 27-year loan and is credited with all equity that has accrued through appreciation and paying down the loan.
Property Owners Face Big Insurance Issues

Although the inability to obtain insurance covering acts of terrorism has been widely reported, property owners also are facing an explosion in premiums costs for all types of insurance, curtailed coverage and larger deductibles.

According to an analysis by the National Affordable Housing Management Association (NAHMA), the median increase in premiums is in the 80 percent to 100 percent range. But NAHMA's George Caruso reported that hikes of up to 400 percent "are not uncommon."

Deductibles also are "headed up sharply," according to research, with many renewal policies typically being offered with deductibles in the $25,000 to $50,000 range.

In addition, new policies are coming with numerous exclusions. Not just acts of terrorism are being eliminated from coverage, but also toxic mold claims, airborne pathogens like anthrax and many other types of health claims.

In the residential sector, though, state regulators have rejected an insurance industry proposal that would have excluded terrorism coverage from homeowner's policies and other personal lines of property and casualty insurance.

Members of the National Association of Insurance Commissioners (NAIC), a voluntary organization of chief insurance business regulatory officials, decided that terrorism exclusions were "generally not necessary...to maintain a competitive market" and may even "violate state law."

At the same time, however, NAIC's members did leave the door open for insurers to seek exclusions on a case-by-case basis, saying that there "may be unique company circumstances that need to be considered in individual cases."

Primary insurers have been telling their regulators that re-insurers, who often assume large portions of risk in exchange for a share of the premiums, are excluding terrorism coverage.

Without it, they say, homeowners face potential exposure to losses resulting from bio-chemical attack.

No deals have been killed yet because of insurance issues, William Frazer of L.J. Melody Co., a large Houston-based commercial and multi-family lender said at the Mortgage Bankers Association's (MBA) annual commercial real estate financing/multi-family housing convention in Orlando earlier this month.

"But it's just a matter of time" before they are, he added.

Others, however, say the situation is worsening. A lot of pending deals "are not closing until the problem is solved," reported Stacey Berger of Midland Loan Services, Kansas City, one of the nation's largest servicers of multi-family and commercial mortgages.

In what Caruso calls a "periodic market cycle," insurance costs have been on a gradual upswing for some time. But the September 11 terrorist attacks accelerated the climb.

"Anyone who has had to renegotiate an insurance policy in the last six months knows that premiums are headed up very sharply," he said.

Increases vary widely. Rural properties aren't affected nearly as much as those in major metropolitan areas, according to the NAHMA analysis. And "trophy" buildings, both residential and office, are "being clobbered."

Owners in places in New York, Chicago and other large cities are finding that coverage is not available at any price, Caruso found.

Most landlords seem to be passing the increased costs on to their tenants, often on a dollar-to-dollar basis. But those who run apartment projects occupied by low and moderate-income tenants are prohibited by the government from raising their rents.

They have petitioned the Department of Housing and Urban Development (HUD) for relief. But, according to Caruso, HUD is taking its time looking at the issue. "The current administration is not going to move ahead with any modifications...until they study the effects," he recently told his members, who manage properties built and operated under various federal subsidy programs. "The present HUD decision makers are not going to come charging in with a plan to address the increase without a lot of study first."

At the MBA meeting, Assistant HUD Sec. John Weicher said his agency is "certainly aware" that there is an issue with insurance but has yet to decide how to deal with it.

"We are trying to balance the problem with the need to operate a sound program," the FHA Commissioner said. "But we are not there yet."

Coming up with the money to pay higher insurance premiums is only part of the problem, however. Apartment landlords are also faced with being certain coverage meets the requirements of the government entity underwriting the mortgage on the property.

The issue is two-fold, said Caruso: 1) if coverage is not available, it can't be purchased, and 2) if the cost is prohibitive, it could push the property into default.

Higher deductibles are being seen in all locations, but the largest increases are in coastal areas where flooding is possible, hail-prone locations and the Tornado Alley states of Kansas, Oklahoma, Texas and Nebraska.

In some cases, insurers are pegging the deductible at 2 percent to 5 percent of the total value of the property.