Real estate agent Mickey Knickerbocker was surprised when her client closed on a $905,000 Manhattan Beach, Calif., town house using “piggyback” financing: a two-mortgage deal designed to minimize the down payment.
Popular in the housing boom, piggybacks all but vanished after the meltdown taught banks and regulators a lesson: Borrowers needed to have skin in the game. So the loans seemed like a throwback to the days of carefree lending, especially on such a pricey property.
“I don’t think, a year ago, I could have gotten loans that would have served this purpose,” Ms. Knickerbocker said. “I didn’t even know … that this was going to be possible.”
With home prices rising, risk is creeping back into mortgage lending. In addition to creative down-payment arrangements, mortgages on high-end properties — so-called jumbo loans — have become plentiful and cheap. Banks are accepting borrowers with lower credit scores and allowing them to take on more debt relative to their incomes, experts and industry professionals say.
“We are definitely not seeing the looseness we saw during the boom years, but it seems to me that the pendulum is swinging back,” said Erin Lantz, director of real estate Web site Zillow.com’s mortgage market.
The relaxing of standards comes as banks rely more heavily on new home loans to replace big profits from the recent boom in refinancing, driven by historically low rates. As demand for refinancing drops and interest rates start to rise some analysts say an improving economic outlook will cause banks to lower standards further.
It’s hard to gauge exactly how banks are changing their rules. But some data indicate buyers are putting less down these days. Ellie Mae, a software provider that tracks U.S. mortgage transactions, estimates that the typical down payment for a purchase mortgage has fallen from 22 percent in early 2012 to about 20 percent in recent months. In the case of refinancing, the average amount of equity required in a loan has fallen from 35 percent to about 27 percent over that same period.
From March, 2011, to March, 2013, Zillow’s Mortgage Marketplace tracked nearly a 7-fold increase in the number of lenders offering mortgages with down payments of 3.5 percent to 5 percent, the firm said. And those loans were not Federal Housing Administration loans, which allow down payments of as little as 3.5 percent.
Major banks say they are making new mortgage loans to buyers a major focus. In California, Wells Fargo also lowered the size of its down payments on certain loans from 10 percent to 3 percent, said Larry Garcia, Los Angeles coastal area sales manager.