Lessons Learned from Mortgage Financing Roundtables · 2019-03-15 · NSP Financing Webinar Series...

Presenters

• Host: National Development Council

• Moderator: TBD

• Presenters:

– Craig Nickerson, National Community Stabilization Trust

(NCST)

– Rob Grossinger, Enterprise Community Partners

(Enterprise)

2 U.S. Department of Housing and Urban Development • Community Planning and Development

NSP Financing Webinar Series

• #1 – Lessons Learned from Mortgage Financing

Roundtables – January 19th

• #2 – Deeper Dive on Mortgage Financing Tips – January

24th

• #3 – Leveraging NSP Funds to Attract Interim Financing

– February 2nd


Additional Resources

• Guide to Understanding Mortgage Financing for NSP-

Assisted Homebuyers

• Interim Financing for Neighborhood Stabilization

Programs


Webinar Objectives Today

• Separate fact from fiction regarding single-family

mortgage lending underwriting guidelines

• Identify ways local program design can affect the

availability of single-family mortgage capital

• Illustrate ways to effectively structure soft second

programs

• Identify strategies to overcome key obstacles to

accessing mortgage capital for your NSP homebuyers


Overview: Mortgage Financing Roundtables

• At HUD’s request, Enterprise and NCST facilitated a

dialogue to identify ways to increase lending in NSP

neighborhoods

• Six regional sessions last summer

– Chicago, Orlando, Los Angeles

– Sacramento, Newark and Atlanta

• Small interactive discussions between grantees and

lenders

– 96 grantees

– 51 lender representatives


Assessing Private Capital Needs Results

• Prior to Roundtables, Enterprise and NCST conducted

assessment to understand the obstacles grantees face

in securing mortgage capital – 174 respondents

– Over 75% experienced problems with accessing

permanent mortgage financing for NSP homebuyers

– Creditworthiness is the primary issue that inhibits

homeownership for potential NSP homebuyers

– Most grantees use FHA mortgage products for buyers of

NSP properties

– Majority believe lenders know very little to nothing at all

about federal and local NSP efforts


5 Key Takeaways from Roundtables

1. Securing permanent mortgage financing for prospective

buyers is a daunting challenge for most grantees (75%

of 174 assessment respondents)

2. Tighter credit standards in the wake of the crisis is the

biggest obstacle to getting borrowers into NSP homes

3. Subordinate financing structures that meet NSP

requirements may not fit with lender rules, thus

preventing or delaying approval of soft second

financing


5 Key Takeaways from Roundtables

4. Low or inaccurate appraisals have become a major

issue for grantees, precluding many mortgage deals

5. Misinformation about NSP efforts is preventing progress

– a better understanding of NSP among real estate

professionals, appraisers, local lenders is critical to

success


Today’s Lending Landscape

• Fewer mortgage originators

– National / Regional / Community / Credit Unions

• A return to basics – more responsible mortgages and

fewer exotic offerings

– Resurgence of FHA as a preferred product option

– Renewed reliance on GSE secondary market guidelines

(Freddie Mac and Fannie Mae)

– Return to underwriting fundamentals and tighter credit

standards

– Emergence of some NSP portfolio products


Return to the 3Cs

• Credit

– Credit score minimums are much higher, especially for

conventional mortgages

– Less reliance on compensating factors

• Capacity

– Debt-to-income (DTI) ratio tightening

– Implications for soft seconds

• Collateral

– Loan-to-value (LTV) ratio

– Borrower “skin in the game”


NSP Program Design Options

Mortgage options vary depending on the program

design option:

• Option 1 - Direct to Homebuyer: the homebuyer

purchases the foreclosed or abandoned property directly

from financial institution, often with downpayment or

other subsidy assistance

• Option 2 - Turnkey: NSP grantee or designee

purchases, renovates and sells the property to a

qualified homebuyer


Direct to Homebuyer Approach

• Use when:

– Properties being purchased are in relatively good physical

condition

– High demand for homes exists

– Sufficient financing is available for purchase and/or

purchase/rehab mortgages

– FHA 203(k) often employed with this option

– Alternatively, subordinate public/private capital is available

for property renovations


Turnkey Approach

• Use when:

– Purchase/rehab mortgages are not easily accessible

– Level of renovation is too extensive

– Newly renovated properties are needed to attract

potential homebuyers

– Speed and efficiency of execution is essential

– NSP and other public/private investments are

available for property redevelopment

– Mortgage lender hesitancy in distressed areas exists


Key Takeaways: Program Design

• Identify the type of financing that is readily available in

your market, before you design your program

• Many lenders are uncomfortable with the risks

associated with property repairs as part of the long-term

mortgage

• Determine the level of involvement grantee can have

with the rehabilitation of property if purchase/rehab

product will be used


Homebuyer Assistance Options

• NSP fund flexibility can help homebuyers qualify for

mortgage financing

• Understand the mortgage qualifying obstacles you need

to help overcome

• Is the primary obstacle

– Monthly carrying cost of PITI?

– Lack of cash for closing and downpayment?

– Impaired credit or past foreclosure or bankruptcy?


Cash-to-Close Options

• Downpayment and closing cost assistance

• Principal reduction or gap financing

• Interest-rate buydown

• Seller concessions

• Alternative borrower contributions (gifts, retirement)

• Mortgage Credit Certificates

• Repayment options – Keep it simple!


Credit-Challenged Options

• Government loan guarantee

• Cash or cash-equivalent reserves

• Co-borrowers (but be careful)

• Continued credit counseling

• Lease to own


Soft Second Structures

• Recapture

– Used to recover all or a portion of the NSP soft second

assistance when the property is sold or transferred

• Resale

– Used to ensure NSP-assisted properties remain affordable

under the full term of the affordability period, even after

sale or transfer

– A property covenant or deed restriction is established

– Will typically slow down or prevent loan originator approval


GSE Soft Second Requirements

GSE Soft Second rules quite flexible

• If interest is charged on the subsidy, the interest cannot be higher

than 2 points above the interest of the first mortgage

• Accrual of interest is not allowed during period when payments on

the loan are deferred (negative amortization)

• CLTV (combined loan-to-value) of the first mortgage and other

subordinate financing cannot generally exceed 105% of property

value

• No balloon payments due prior to end of first mortgage term


GSE Soft Second Requirements

• Other requirements can be found at:

– Fannie Mae Community Seconds checklist:

https://www.efanniemae.com/sf/mortgageproducts/pdf/csc

hecklist.pdf

– Freddie Mac Affordable Seconds:

http://www.freddiemac.com/sell/expmkts/affsec.html


FHA Soft Second Requirements

• Subordinate lien must be in the subsidy provider’s name

• If second mortgage is offered by government agency or

nonprofit designee, the soft second may be used for

downpayment, closing costs including the borrower’s

minimum investment

• If resale restrictions are in place, those restrictions must

terminate in the event of a foreclosure or deed-in-lieu


FHA Soft Second Requirements

• Other requirements can be found at:

– Downpayment Assistance through Secondary Financing

Providers:

http://portal.hud.gov/hudportal/HUD?src=/program offices/

housing/sfh/np/sfhdap01


Soft Second Program Design Pointers

• Deferred loans are the cleanest subordinate financing

structures

• Zero interest (interest rate accrual on a DPL is a no-no)

• Payment deferred for the first 5 to 10 years

• No payment at all for the entire term of the loan unless

property is sold or transferred

• In weak markets, forgiveness of deferred loan, either

partially or fully over a period of time

• Deeper dive next webinar – January 24th


FHA or Conventional?

The answer is . . . It depends!

The right path will depend on many factors, including:

• The Loan To Value

• Borrower contribution

• Market area

• Lender preferences

• Soft second structure and nonprofit provider

• Whether rehab is part of the purchase mortgage


Property Appraisals

• Major mortgage issue that surfaced at Roundtables

• NSP homes too frequently do not appraise for true value

– Means that NSP grantees cannot sell homes

– Prospective buyers cannot obtain a mortgage

• Appraisers often are poorly informed on neighborhood

stabilization programs

• Appraisers rely on “comps” that are not comparable;

using blighted homes or cosmetically repaired homes

• HVCC regulation prohibits lenders from having direct

communication with appraisers on property level


Key Takeaways: Property Appraisals

• Meet with lenders and AMC’s to increase accountability

and reduce number of participating appraisers

• Seek program wide pre-approval of approaches with

lenders, GSEs, state HFAs

• Educate appraisers on NSP homes – quality, green

construction, energy efficiency – to help create fairer

valuations

• Create informational materials – brochures, FAQs, cheat

sheets – for appraisers highlighting the key features of

your properties


Key Takeaways: Property Appraisals

• Conduct training for the appraisal industry on NSP

• Focus on rehabbing specific blocks so you can control

the comps and valuations by increasing the value of

targeted blocks

• Encourage state appraiser licensing boards to convene

meeting on NSP valuations

• Long term, create special designation for community

stabilization appraisers (i.e. NSP Appraiser)


Collaborating with Real Estate Professionals

• Grantees are finding it difficult to market NSP homes

• Building strong relationships with real estate

professionals in the community is key component to a

successful program

• Can lead to a well-coordinated program that provides

tangible benefits to real estate professionals,

homebuyers and the community

• Real estate professionals can market homes and

rebrand neighborhoods too


Key Takeaways:

Real Estate Professional Collaboration

• Real estate staff often steer clear of red tape of federal

housing programs

• Educate real estate professionals on the positive

attributes of the NSP program and homes

• Engage local Realtor boards – have participating lenders

speak at training

• Create a list on your website of active/certified real

estate professionals who have completed a few

transactions


Conclusion

• Mortgage underwriting has become more stringent; it’s a

return to the basics

• High LTV lending is still possible with borrower skin in

the game, truly soft seconds, and borrower readiness

• Turnkey NSP programs where the renovation is

completed prior to sale make attracting mortgage

financing easier

• Keep soft second program designs simple to understand

and implement

• Ensure that all key housing industry partners are

informed and accountable.


Questions and Answers


A Preview of Coming Attractions

January 24th – A Deeper Dive on Mortgage Financing

webinar session will explore some key issues in more

detail

January 31st – Leveraging NSP Funds to Attract Interim

Financing webinar session will illustrate ways to expand

the scope and scale of NSP projects with creative

financing mechanisms


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Lessons Learned from Mortgage Financing Roundtables · 2019-03-15 · NSP Financing Webinar Series...

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