A credit thaw is offering more mortgage options

U.S. consumers are finding it easier to get a mortgage, after years of near frozen credit following the financial crisis. This, in turn, is giving way to more creative loan products, as well as more unusual ways of using existing loan products.

The heat behind the credit thaw is simple clarification. After the crash of the subprime mortgage market, lenders were hit with billions of dollars in lawsuits and loan buybacks by Fannie Mae, Freddie Mac and the federal government. Afraid of having to buy back future loans, even pristine ones, lenders shut the door to anyone without virtually pristine credit. That is finally changing.

"Now that we know more of the rules than we did in the past, you're seeing credit widening to a wider spectrum," said Greg Gwizdz, executive vice president at Wells Fargo Mortgage.

Bank of America branch in New York.
Ron Antonelli | Bloomberg | Getty Images
Bank of America branch in New York.

New rules from the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, conservator of Fannie Mae and Freddie Mac, have recently clarified which loans will be safe from repurchase risk.

"We have listened closely to your concerns about the impact that loan repurchases have had on your businesses, and we understand that addressing these concerns in ways that are mutually satisfactory to you and the enterprises is critical to ensuring that there is liquidity in the housing finance market and to providing access to credit for borrowers," FHFA Director Mel Watt told lenders last fall at the Mortgage Bankers Association's annual convention.

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Lenders must now verify a borrower's ability to repay a loan, something that might sound intuitive but which was basically nonexistent during the heady days of the housing boom. They also have to verify income and assets.

Now that the rules are clearer, lenders are getting more creative. Wells Fargo, for instance, is offering its jumbo loan borrowers (mortgages for more than $417,000) a new way to lower their monthly payments. This is because they hold these loans on their books, rather than selling them to Fannie Mae or Freddie Mac.

"If you pay down your mortgage at Wells Fargo, in an amount of $50,000 or more, we re-amortize the loan and lower your monthly payment," said Gwizdz.

In the past, and commonly in the industry, if a borrower paid down the balance of the loan, the term would shorten, but the monthly payment wouldn't. This is particularly popular among high net worth borrowers.

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"You have people in those income ranges who receive bonuses and sometimes they choose to put their bonus toward their mortgage," he added.

Another option is in the home equity loan space. Jacksonville, Florida-based EverBank is promoting its home equity line of credit as a means to buy a home. While this has always been possible, it is not something borrowers usually do. Instead they use these loans, which pull equity out of a home the borrower already owns, for home improvement projects or to pay for their children's education. Now they're using them to buy second homes.

In an especially competitive market, however, where cash is king, having the home equity line to actually buy the home can give the buyer an advantage. Much like a regular mortgage, EverBank offers the loan based on the value of the home, but instead of a fixed amount, it's an open end line of credit. It gives the borrower the opportunity to take future draws of cash. Again, this product is best suited to the more affluent buyer.

"It takes a little bit of the pressure off the sales transaction, if you have that available cash to close upfront. For many people it's all about getting the home," said Tom Wind, executive vice president of home lending at EverBank.

For borrowers who want cash from their homes without debt, a new loan option recently introduced by San Diego-based EquityKey allows borrowers to sell the future price appreciation of their homes, for cash. For example, if you buy a house for $500,000, and you expect the value to increase by another $300,000 before you sell it, you can sell a percentage of that appreciation to EquityKey.

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"We refer to it as a real estate participation agreement, because the key difference between debt and equity is while we will participate in the upside, we have no absolute right of getting paid back the initial principle investment," said Jeff Nash, co-founder of EquityKey. "If home prices go lower, we reduce the amount we are owed, until we are owed nothing."

That money can be used for anything, even a down payment on a second home. Once the home is sold, EquityKey gets 75 percent of the change in that market's home values, as measured by the S&P Case Shiller home price index.

John Norris, 70, closed on an agreement with EquityKey last week, selling the future appreciation of the La Jolla, California, home he's owned for 20 years. He's going to use the cash to fund a new business and thought it was a better deal than a reverse mortgage, which is designed to give older borrowers cash from their homes.

"It's very expensive to do a reverse mortgage, with the upfront fees, points and so forth. With EquityKey, there isn't any."

Some of these may sound riskier than the traditional 30-year fixed mortgage, still used by the vast majority of today's borrowers, but the fact that they are coming into the market today is a sign of more creativity in lending yet to come.

"I wouldn't try every crazy, new idea that comes along, but I certainly wouldn't rule them out, because some place in there I think you're going to see is some ideas that are very good," said David Blitzer,of S&P Dow Jones Indices, a partner in the S&P Case Shiller home price indexes.

Blitzer said the EquityKey product could be especially helpful to young, first-time buyers who are having a hard time becoming home owners.

"Their prospects in the future may be wonderful, but their cold cash on the spot is not wonderful, so if you can do things like let them monetize in advance some of the future value of the house, that's big plus," he said.

—CNBC real estate producer Stephanie Dhue contributed to this report.