Real estate agent Mickey Knickerbocker was as surprised as anybody else 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 during the housing boom, piggybacks all but disappeared after the mortgage meltdown taught banks and regulators a big 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,” 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 also gotten plentiful and cheap. Meanwhile, 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 website 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 declines – 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 saw a nearly sevenfold increase in the number of lenders offering mortgages with down payments of 3.5 percent to 5 percent, the company 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.
“We have had a huge emphasis on the purchase market for really quite some time,” Garcia said.
Bank of America has noticed interest from buyers who are looking to expand into bigger homes.
“The overall economic picture is certainly better,” said Franco Terango, an executive with Bank of America Home Loans. “The overall picture from an equity standpoint is better for folks who are interested in moving up.”
And financing options that were widely unavailable during the bust are also starting to return.
“More people want to buy, and prices are going up. So the banks are willing to loan,” Glendora, Calif. real estate agent Zak Bushey said. “They wouldn’t be lending with little down if they thought there was any chance that (prices) were just going to stay here, or come back down.”
The return of piggyback loans is a clear sign of mortgage bankers’ shifting outlook. Typically, such arrangements allow buyers to take one mortgage for 80 percent of the home’s value and a second mortgage for 10 percent, allowing the buyer to put down a lot less cash.
Paying higher interest on the second mortgage, about 5.25 percent in today’s market, can cost less than private mortgage insurance, typically charged on all loans in which the buyer has less than 20 percent equity in the property.
Piggyback loans can also be used to help borrowers avoid the higher interest rates on jumbo mortgages – loans too large to be sold to mortgage giants Freddie Mac and Fannie Mae.
In some instances, banks are allowing buyers to simply put less down. And that’s helping to finance deals in a rapidly rising market, where many properties are fetching competing bids.
“The flexibility in down payments is really a big factor right now, especially with the rising prices,” said M. Tyson Flynn, an agent with Rodeo Realty in the Los Angeles area. “Because prices have come up, it helps to put less down.”
Aaron Scott, also an agent with Rodeo Realty, said he recently had a client that purchased an $850,000 home with a 10 percent down payment.
“We are seeing more products becoming available, with 5 percent down and 10 percent down, more regularly than were a couple years ago,” Scott said. “You find that they are able to find more and more solutions.”
As the housing markets have begun to improve, the minimum down payments for jumbo loans have also declined. After the mortgage meltdown, a jumbo loan – if you could find one – often required more than 30 percent down. Now, jumbos with 20 percent down payments are common.
“Three years ago, almost nobody had jumbos,” said Jeff Lazerson, an independent mortgage broker in Laguna Niguel, Calif. who works with about 10 lenders. “And now, I have just one lender who doesn’t have a true jumbo.”
Jeff Leininger, 40, put 20 percent down on an $865,000 home in Agoura, Calif., where he’s moving with his wife and two children. The interest rate is about 4 percent, just slightly higher than a conventional loan that qualifies for the backing of Fannie Mae. “It didn’t totally price us out by going to the jumbo,” he said.
Will Lin, a 30-year-old engineer renting in West Los Angeles, is looking to buy a single-family home in Westchester. He recently bid on one home that caught his eye, offering $725,000, for which he was pre-approved to put down just 12 percent. Lin has confidence he can handle the payments.
Still, the high amount he found banks willing to lend made him feel uncomfortable.
Lin says that as “a responsible” borrower, “I would not want 45 percent or 50 percent debt-to-income,” referring to the primary measure banks use to size up borrowers’ ability to pay. “But according to the banks, they would still lend that out – and to me, that seems irresponsible.”