Ben Slayton’s Legacy Home Loans, the largest Black-led mortgage banking firm in the country, has launched a special purpose credit program for prospective Black borrowers in six cities across the country.

The SPCP, called “closing the gap,” permits a 1% down payment with a free appraisal, free home warranty program, free homebuying counseling and financial assistance with closing costs. The SPCP loan program will be piloted in Atlanta, Baltimore, Chicago, Detroit, Memphis and Philadelphia. Borrowers must presently reside in a census tract of the six cities that has 51% or more Black population.

The loan program uses credit guidelines based on factors such as timely rent, utility bill, phone, and auto insurance payments. The underwriting guidelines are based on the borrower’s income with a minimum credit core of 620.

“There may be others coming out with similar SPCP loan programs, but don’t be fooled, Legacy Home Loans is where you are celebrated not just tolerated,” said Slayton, who was the first Black Realtor to be licensed in the U.S., and has worked in the mortgage industry for over 50 years.

Only recently have mortgage lenders felt comfortable moving forward with special purpose credit programs. In December, the Department of Housing and Urban Development released guidance that SPCPs would not violate the Fair Housing Act, which has long discouraged creditors from developing programs.

A few months later, seven federal agencies — including the the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, the Department of Justice and the Federal Housing Finance Agency — released a statement encouraging lenders to develop SPCPs.

In a press statement, Legacy noted the 30% homeownership gap between Blacks and whites.

In June, the FHFA unveiled equitable housing finance plans for Fannie Mae and Freddie Mac, which establish a framework for the government-sponsored enterprises to close the racial homeownership gap.

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Home prices have started to drop, but the decline has not been significant enough to brighten pessimism about the housing market.

Fannie Mae’s Home Purchase Sentiment Index (HPSI), which tracks the housing market and consumer confidence to sell or buy a home, dropped by 0.8 points in August to 62, marking its sixth consecutive decline. The government-sponsored enterprise attributed high home prices and mortgage rates to the decline, particularly weighing on home-selling sentiment. Year over year, the index is down 13.7 points.

On the seller side, 35% said it was a bad time to sell, rising from 27% in July. About 59% said it’s a good time to sell, dropping from the previous month’s 67%. 

“The share of consumers expecting home prices to go down over the next year increased substantially in August. Accompanying this, HPSI respondents reported a significant decrease in home-selling sentiment,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. 

Following a slow down in home price appreciation, prices slipped 0.77% in July from June, marking the largest single-month decline in the housing market since January 2011, according to Black Knight. About 85% of major housing markets, mainly in the West Coast, saw prices pull back from their peak levels, and more price corrections are expected across the U.S.

“We also observed a large decline in consumers reporting high home prices as the primary reason for it being a good time to sell a home, suggesting that expectations of slowing or declining home prices have begun to negatively affect selling sentiment,” Duncan said. 

On the other hand, lower home prices would be welcome news for potential first-time homebuyers, who are disproportionately affected by high home prices and high mortgage rates.

Overall, 22% of respondents said it was a good time to buy a home in August, up from 17% a month prior, but 73% said it was a bad time to buy, down from 76% in July.

Consumers were not optimistic about mortgage rates. About 11% of respondents said that mortgage rates will go down in the next 12 months while 61% stated that mortgage rates will go up.

Mortgage rates have been on a rising trend in recent weeks ahead of another potential rate hike by the Federal Reserve later this month. Purchase mortgage rates rose to an average of 5.89% this week. 

“With home prices expected to moderate over the forecast horizon and economic uncertainty heightened, both homebuyers and home-sellers may be incentivized to remain on the sidelines – homebuyers anticipating home price declines and potential home-sellers not keen to give up their lower, fixed mortgage rate – contributing to a further cooling in home sales through the end of the year,” Duncan said.

Goldman Sachs, in a paper titled “The Housing Downturn: Further to Fall,” forecasted that new and existing home sales are going to fall 22% and 17% respectively this year. Next year, the investment predicted new and existing home sales will drop another 8% and 14%.

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Bank of America recently announced a loan for lower-income households that doesn’t require homebuyers to come up with a downpayment or closing costs, and doesn’t base the loan on a minimum FICO score. People’s first reaction was to wonder if this was 2008 all over again. Are we really doing those types of loans and promoting homeownership again without understanding the risks?

Well, it isn’t 2008, but this type of loan does have risk — and it’s the risk that is traditional among all late economic cycle lending in America when the loan requires low or no downpayment. For sure, this Bank of America loan doesn’t have the exotic loan debt structures that caused so much pain during the housing crash years, but it’s good to understand what could happen.

First, to explain my logic here, I need to express what I believe housing is: “Housing is the cost of shelter to your capacity to own the debt. It’s not an investment.”

Part of our housing dilemma is this: How can you make something affordable when you promote it as someone’s best investment? Since many people think of housing as a wealth creator — and we want more Americans to have more wealth — then the government needs to make sure demand stays high enough for that wealth product to grow.

The entire system has to be designed to inflate the price over time. This is what we do in America. The housing market is very subsidized for demand to grow and whenever the economy gets weaker, rates fall and that impacts the housing market in a disproportionate way. 

When mortgage rates fall, the majority of homebuyers (including homeowners who need to sell to buy another home) are mostly employed, so lower rates greatly benefit them, and housing demand increases. This can lead to home prices getting out of control, especially when total inventory gets to all-time lows. That is what has happened here in the U.S. We finally paid the price — pun intended — of not having enough product, with massive home price gains from 2020-2022.

The National Association of Realtors’ total Inventory data shows that historically we have between 2 to 2.5 million homes for sale, but in 2022 we got as low as 870,000 in total inventory. I always like to add that active listings were higher in the 1980s — and we have a lot more people now. So when you add move-up buyers, move-down buyers, first-time homebuyers, cash buyers and investors together, this can get out of hand.

We can see a clear deviation in home-price growth starting in 2020, when we broke to all-time lows in inventory. So if it seems like I was panicking about home-price growth and desperately wanted the inventory to grow, you can see my logic. By the summer and fall of 2020, I was basically into “danger, danger, Will Robinson” mode as inventory channels broke at the worst time possible for our country.

Now, we are talking about a housing reset, and the Federal Reserve is hiking rates with a tone that even implies they realize they can create a job loss recession! I just want emphasize this: the Federal Reserve is actively saying households are going to feel pain and some are making statements that they might not cut rates during a recession if inflation is high.

For the traditional homeowner who bought a home many years ago and has seen their nested equity position explode higher, this isn’t much of an issue. If they lost their job, they have a lot of equity in their home, and most likely their financials have gotten better over time.

This is a plus of homeownership, a fixed long-term debt cost while their wages rise every year. As you can see below, we haven’t had the mortgage credit boom like we saw during the housing bubble years. So, not only do we have 40% plus of homes with no mortgage, the nested equity homeowners have now is almost unfair. Remember, the system is designed to keep home prices inflated.

I always stress how crucial it was to have the 2005 bankruptcy reform laws and the 2010 qualified mortgage laws, which together have allowed homeowners to have the best financial profiles in our country’s history. When we look at the credit data over the past 10 years, it looks nothing like the stress we saw from 2003-2008, which was an economic expansion and jobs being created before the job loss recession in 2008.

Homeowners buy a home, have a fixed payment, and over the life of the loan, as their wages grow, their cash flow gets better.

FICO scores look a lot better now than in the run up to the great financial crisis. So you can see the benefit of having a fixed payment shelter cost, while your wages rise. We don’t have any more 100% loans that have significant recast rate risk, so that the total payment of the home can force someone to sell, even if two people are working full time and haven’t lost their jobs. We have a much better housing ecosystem now for sure.

With that all said, the concern I have with Bank of America’s no-down loan will be the concern I always have with late-cycle lending in any economic expansion. If we are going to provide 100% financing with no closing costs and the Federal Reserve is talking about the need for a recession, then I believe we need to make sure people realize the risk of this type of loan. I have to make this statement because all six of my recession flags are up. 

Suppose all parties understand the risk of the Bank of America 100% loan and other low downpayment loans at the same time the Federal Reserve is trying to increase the unemployment rate. In that case, nobody can be blamed for the product — whether they are the ones offering the loan or the ones taking it.

In theory, you should never lose your home unless you lose a job or you experience a financial emergency. Your home is where you raise your family and that mortgage payment you make each month should make you sleep easy every night. 

However, no matter how sound the loan is, we can’t close our eyes to the economic cycle risk, especially when we have Federal Reserve officials talking about the need to have unemployment rates going up to help combat inflation. 

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Fiercer competition in the wholesale channel spurred United Wholesale Mortgage (UWM) to increase the ceiling on conforming loans on Wednesday, ahead of the Federal Housing Finance Agency’s (FHFA) decision in November.

UWM’s move follows an announcement on Tuesday from competitor Rocket Pro TPO, which was first out of the gate this year in raising loan limits on agency-eligible properties to $715,000.

On Wednesday, UWM increased the conforming loan limit from $647,200 to $715,000 for a one-unit property, forecasting that the FHFA will increase the limit by at least 10% in 2023.

In Alaska and Hawaii, the ceiling on loans originated by UWM and purchased by Fannie Mae and Freddie Mac rose from $970,800 to $1.073 million.

UWM said it is focused on “giving mortgage brokers a competitive advantage.”  

Last year, lenders didn’t raise conventional loan limits until Sept. 30, when rates were still in the low 3% range. However, this year, companies are under pressure to launch new initiatives to attract brokers and land more purchase businesses amid high mortgage rates.

UWM, for example, launched the Game On pricing initiative in June and entered the HELOC space in August. Meanwhile, Rocket Pro TPO also plans to diversify its product portfolio by offering home equity loans in mid-September. 

The expectation is that other mortgage lenders increase loan limits ahead of the FHFA’s November announcement.

The Housing and Economic Recovery Act established a formula in 2008 that mandated that the ceiling could only rise after home prices returned to pre-recession levels. That condition was finally met in 2016 when the FHFA increased the conforming limits for the first time in a decade. 

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