Easy Loan Standards May Backfire On First-Time Buyer

They've been the hottest marketing techniques in the home mortgage arena for the past two years - especially for first-time buyers:

-- Mini-downpayment programs that go to 3 percent or even less.

-- Relaxed credit standards, including instant absolution for past non-payment sins on your credit cards or auto loans.

-- Superstretch debt-to-income ratios that allow renters to buy a home by devoting unprecedented chunks of their take-home money to credit payments, rather than food or savings.

But new, ominous signs are emerging that easy-loan standards like these may be backfiring. They may be putting lenders - and their customers - into hot water. Consider research findings provided by two national organizations that closely track how borrowers are performing on their home mortgages.

San Francisco-based Mortgage Information Corp., which monitors the loans of over 16 million American homeowners through cooperative relationships with large lenders, reports that delinquencies on new mortgages closed in 1994 are rising dramatically.

Dan Feshbach, president of the firm, says that 1994-closed loans are "performing three times worse" than those closed the year before. The primary cause: Low downpayments - under 20 percent down - which surged from 20 percent of total loans in 1993 to 33 percent of the market in 1994.

Communities with the sharpest increases in the percentage of low-downpayment mortgages, according to Feshbach, are seeing the biggest problems with new borrowers falling behind. Washington, D.C., for example, registered a 68 percent jump in low-downpayment loans last year, and is now experiencing a delinquency rate on those loans 178 percent higher than the year before.

Take a look, too, at the early warning signals flashed by another professional pulse-taker of the marketplace. Mortgage Guaranty Insurance Corp. (MGIC), one of the highest-volume insurers of low-downpayment home loans, is worried about the impacts of softened loan standards. In new research, executive vice president Gordon Steinbach describes recent performance on so-called "affordable" mortgages made to lower and moderate-income buyers. Increasing such loans sharply has been a major priority of the Clinton administration.

-- Borrowers who were granted loans using nontraditional credit file standards - that is, not requiring squeaky clean credit histories - are falling behind on monthly payments at four times the rate of borrowers approved using traditional credit standards. Borrowers approved with no credit history whatsoever - a technique commonly used to qualify immigrant applicants - are delinquent at eight times the rate of home buyers with standard credit histories.

-- Borrowers taking advantage of mini-downpayment programs promoted by many lenders are far more likely to become delinquent than those with larger downpayments. Home buyers putting down just 3 percent of their own funds are defaulting at twice the frequency of buyers with 5 percent down. Buyers with 10 percent downpayments, in turn, are half as likely to default as those with 5 percent downpayments.

-- Home buyers whose debt-to-income ratios go higher than the traditional ceilings are also considerably more likely to fall behind on payments. Loans made to borrowers with more than 33 percent of monthly household income going to housing-related costs, and more than 38 percent of income going to all forms of debt, have 60 percent higher delinquency rates than standard borrowers.

Steinbach, whose research findings were published in the Mortgage Bankers Association of America monthly trade journal, said in an interview that politically correct or not, "results like these are just not tolerable." Not only must lenders and insurance companies like his bear the default and foreclosure losses from nonpaying new buyers, "but there are the negative effects on the borrowers themselves. We're putting people into homes who are not ready, and whose financial problems can really wreck their lives."

Significantly, Steinbach doesn't want to roll back the clock to the 1980s and scrap the national drive for more affordable home mortgages. He doesn't advocate a wholesale return to standard underwriting. Instead, he says, "we need to do a better job of identifying, educating and working with" low and moderate-income families who are ready to make the financial leap to home ownership. Cultural and religious organizations in central city and minority communities, he says, should be asked to play a far greater role in educating and counseling prospective borrowers in the months prior to application. And lenders should be far quicker to intervene with help or advice when they spot the first signs of delinquency.

At the same time, though, Steinbach is emphatic that the mortgage industry has to learn to say no. "There's absolutely no point in putting someone in a house who's going to fail."

(COPYRIGHT, 1995, WASHINGTON POST WRITERS GROUP)