Today, I have some warm and fuzzy news from the mortgage world. Freddie Mac announced a new low financing option for multifamily landlords to help keep rental housing affordable. Borrowers can save money on loans from a wholesale lender who’s not requiring escrow accounts. And, something called “comfort letters” are becoming popular as a way for borrowers to clarify their creditworthiness to underwriters.
This first bit of news about lower financing costs is an attention grabber. It’s a program that provides lower rates to landlords who agree to cap rent increases for the life of the loan. The program is similar to rent control, which is becoming popular across the country, but it’s voluntary so it won’t create a rent control backlash.
Voluntary Rent Control
These new loans are called “Workforce Housing and Targeted Affordable Mezzanine Loans.” They are designed to make it easier for landlords to limit rent growth and work in tandem with conventional loans. They also provide additional debt capital to fill the gap between borrower equity and the senior loan amount. The total combined loan-to-value ratio for the two loans must not exceed 90%.
In exchange, landlords agree to limit rent increases on 80% of their units. There are allowances for unforeseen expenses and one-time capital costs that “extend the useful life and marketability of the property.” Qualified properties must be in neighborhoods that are considered affordable with rents for at least half of the units below or equal to the median rent in that area.
Freddie Mac plans to check on rent rates annually. Violators will be penalized, but, the Freddie Mac website says, penalties will be lifted if rents are returned to agreed-upon levels. This loan option is available immediately. Freddie Mac’s David Brickman says, “It has the potential to help address challenges of access and affordability for working families across the country.” 
Optional Escrow Accounts
United Wholesale Mortgage is also giving home buyers a way to save thousands of dollars in closing costs by making escrow accounts optional. Escrow accounts can add almost $4,000 onto closing costs for a $300,000 mortgage. 
By eliminating the requirement, home buyers save money up front, and reduce their monthly mortgage amount. They also assume responsibility for paying their property tax and hazard insurance which is typically paid for by the escrow account.
As you know, escrow accounts are used as a cash reserve for property tax payments, hazard insurance, and sometimes other costs. Borrowers contribute a monthly amount so there’s enough money to cover those bills when they become due, often once or twice a year.
Lenders have traditionally granted waivers to borrowers who don’t want them but only if they have stellar credit and have made substantial down payments of 20% or more. But, this new program loosens those guidelines to include people who’ve put as little as 5% down on homes, and have FICO scores as low as 640.
That’s raising eyebrows among some mortgage and housing experts. The Mortgage Bankers Association’s chief economist, Michael Fratantoni, told the Washington Post, this program could create problems if a large number of people with less than excellent credit opted out of escrow accounts. If they forget to make their annual or semiannual tax or insurance payments, they could be subject to foreclosure. And it may not be a matter of remembering to make those payments, but of having the money when they need it, especially if we have a repeat of the 2008 collapse.
As an article in the Washington Post points out, “Many of the subprime loans that ended up in foreclosure had no escrow accounts. When hard times hit, those borrowers found it difficult to come up with large, lump-sum tax and insurance payments and frequently lost their homes.”
A representative from UAM told the post that the people given waivers are “high-quality borrowers that are approved through automated engines at Fannie Mae and Freddie Mac, and verified by our underwriters.” Mat Ishbia said, “It’s better for consumers to have options.”
Relax, It’s Just a “Comfort Letter”
If you’re waiting for a loan approval letter but your lender asks you to write one to your underwriter, don’t panic. The underwriter just needs clarification on a few things, and the letters are generally not legally binding, just explanatory.
According to the Wall Street Journal, these letters are sometimes called “Comfort Letters.” Bill Banfield, of Quicken Loans, told the Journal, “We try to connect the dots using data… but when you need a little help from the client to connect those dots, letters of explanation are a way to help an underwriter interpret something.”
Issues underwriters might want clarified are things like an employment gap, the distance between a job and the home being purchased, or an unusually large deposit. These comfort letters can provide simple explanations such as the birth of a baby, or a plan to telecommute, or a monetary gift from your parents that doesn’t have to be paid back. Banfield says, “What the underwriter is trying to get at is the stability and continuity of the income they’re using to qualify the client to ensure that they can actually afford the payments.”
The Journal article offers some advice. If you are asked to write one of these letters, “don’t panic.” This is a common part of the mortgage application process. “Address the issue” with a letter that’s concise, accurate, and to the point. Attach any explanatory receipts or canceled checks. If it’s about a late or missed payment on your credit report, tell the underwriter why it happened and why it won’t happen again.
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