By Todd McNeill

While perusing recent press on the strength of the market for new apartment developments, the following thought occurred to me:  Is the current red-hot apartment demand artificially inflated due to lack of financing options for first-time home buyers?

We have all been hearing about the new “norm” in apartment demand.  We all think that we know what the Millennials are thinking; flexibility, smaller living areas, large common areas with tons of amenities, along with a general feeling of “pushback” from the illiquidity associated with home ownership.  This new change in attitude regarding home ownership is coming off the heels of the Gen X and Baby Boomer generations whose dream was to own their own homes.  How much of this new attitude is driven by a lack of low down payment options and stricter underwriting for home purchases?

Today’s Millennials are coming out of school with student debt and do not have the ability to aggregate savings to put into a down payment in order to qualify for a conforming FNMA or Freddie Mac home mortgages.  At 20% down, this is just too much cash for most first-time home buyers.  Moreover, many of these would-be homeowners have debt-to-income ratios that are out of whack because of high student or credit card debt that accrued during those college years.  Toss in a car payment and health insurance, and there just isn’t enough cash flow to save for a down payment.

During late October mortgage financing giants Fannie Mae and Freddie Mac, together with their federal regulator, revised the rules to help loosen constricted lending standards to make mortgages more affordable and easier to obtain by those with less-than-stellar credit.  The move comes in response to criticism that banks have clamped down too much on loan criteria in order to avoid legal liability for any mortgages they sell to Fannie or Freddie that may go bad in the future.

Fannie and Freddie were seized by the government in 2008 during the Great Recession as they teetered on financial collapse.  Government regulators pursued many of the originating lenders over mortgages that defaulted as the market melted down. Many loans were poorly underwritten, with some lenders simply accepting  a borrower’s “statement” on income rather than verifying it.  Lenders who originated these bad loans have been forced to pay billions of dollars in recent years to settle assertions that the bad loans violated representations and warranties made when the loans were sold and often times demanding that the original lender repurchase these bad loans!!!

In reaction to this unforeseen liability, a wave of conservatism has swept over  lenders originating new home loans, implying that the threat of loan repurchase “demands” make the risks worth taking only for borrowers with “top” credit profiles.  The new clearer guidelines are intended to convince lenders that they won’t regret lending to higher-risk but still credit-worthy borrowers.

The new rules clearly delineate what constitutes cause for requiring banks to repurchase loans. Moreover, the new rules reduce the minimum down payment from 5% to 3% when determining if a loan can be sold to Fannie and Freddie.  The reduction in the minimum down payment for most Fannie and Freddie loans to 3% brings the requirement in sync with the Federal Housing Administration, which insures loans made to first-time and lower-income borrowers.