Financing woes choking would-be homeowners’ dreams

If there’s any real estate that should attract buyers when credit is tight, it’s the 18 units of new affordable housing developed by the Dudley Street Neighborhood Initiative (DSNI) and New Boston Ventures.

But, despite a growing list of potential buyers, DSNI Executive Director John Barros says financing has been approved for only a handful.

“We typically sell our homes very quickly,” said Barros, “so, for us, this is slow.”

Located in the Dudley Triangle area, most of the units are single-family homes selling for $185,000 apiece. Even at those prices, according to Barros, some buyers initially approved for loans were later denied.

“The story that keeps coming back,” he said, “is that they’re not able to get mortgages.”

The story can also be heard from real estate agents and city officials. The reasons stretch all the way from credit markets and private mortgage insurance companies to the risks presented by borrowers and Dorchester’s falling property values.

Setting the standard for primary lenders are the stiffer requirements put into effect April 1 by the main buyers of loans on the secondary mortgage market, Fannie Mae and Freddie Mac.

For many homebuyers, the standards require either higher down payments or additional fees. Some buyers of single-family homes would have to pay an extra point, even if they have a good credit history, with FICO scores as high as 739. Two years ago, homebuyers could have qualified for prime loans with scores in the 600s.

Buyers of two- or three-family houses would have to pay an additional 1 percent, even if they have a FICO of 800 and make a down payment of 50 percent. Buyers of condos, regardless their credit score, would have to pay three-quarters of a point, unless their down payment is at least 25 percent. And Fannie Mae is backing loans for condos in new developments only if 70 percent of the units are already occupied.

A commercial real estate broker in Dorchester, Craig Galvin, says the new standards also make it more difficult for owner-occupants of three-family family houses to move on to single-family homes. Since many of those buyers can only sell their multi-family homes in the current market at considerable loss, Galvin says they would prefer to keep the first property and rent the unit where they have been living.

But Galvin says some lenders would only allow the rental income to be counted for buying a single-family home if equity on the multi-family is at least 30 percent—at a time when the Warren Group reports almost two-thirds of the outstanding mortgage amounts in Dorchester exceed the property’s value.

“If you’re going to buy a single, they’re afraid you’re going to leave the three-family and let it go,” he said.

Galvin says the lending standards choke off the “Dorchester dream” of graduating from a multi-family to a single-family home, and clog the cycle of supply and demand.

“There’s a lot of people that want to buy and a lot of people who want to sell,” he said, “but the banks are making it difficult.”
Lenders say they have to raise standards on the kinds of credit and down payment profiles that were associated with higher rates of default.
Standards are also stricter for private mortgage insurance (PMI), which has usually been required for down payments of less than 20 percent. Along with paying the cost of PMI, buyers have to avoid going over the maximum ratio of debt to household income.

Before the foreclosure epidemic, many buyers could sidestep the PMI requirement with little concern about debt ratios or down payments. Instead, they could get two mortgages—one for 80 percent, for which the lender was fully insured—and another at a higher rate for most of the remaining cost. But these “piggy-back” loans would later be shown to have a higher than average default rate.

“No one will do piggy-back loans in this environment,” said the deputy director of Boston’s Dept. of Neighborhood Development, Bill Cotter. “That whole industry is gone.”

And Cotter says decisions on condo loans will hinge on the status of other units in the same building.

“When you’re doing a condo loan, on an existing condo, they generally want it to be 50 percent occupied before it’s Fannie Mae or Freddie Mac warrantable,” he said.

In some cases, it is still possible for some to avoid the new requirements by getting loans insured by the Federal Housing Administration (FHA), or by qualifying for first-time home-buyer programs. Galvin says these options still leave out many buyers in the middle, who lack abundant cash or eligibility for incentives.

“If you’re not going to put down an exorbitant amount of money,” he said, “no bank’s going to give you a loan.”

But Cotter says “there are still some good loans” for buyers in general.

“What ends up happening,” he said, “is you do a little more shopping to find the right match with a lender.”

Barros says DSNI and New Boston Ventures have had more success with small local banks, and one of them, Boston Private Bank, has sent a representative to meet loan applicants in the neighborhood.

“The bigger banks are less friendly to working with folks,” said Barros. “What has really been working for us is working with some of the small banks.”

Like Galvin, Barros says the tougher lending standards will have an effect on property values. But Barros says buyers will have to adapt by paying more attention to credit management and financial literacy.

“It’s calling on us,” he said, “to school them, to provide more information to potential homebuyers in a way that we haven’t done in the past.”

Chris Lovett is the news director and anchor of Neighborhood Network News on BNN-TV and a frequent contributor to the Reporter.