Housing continues to outperform the rest of the economy, but the lending industry shouldn�t be content with the status quo.

At least that�s the opinion of Freddie Mac vice president of community development lending Craig S. Nickerson, who has outlined a series of initiatives Freddie is introducing in single-family lending that target minority and immigrant borrowers.

The initiatives include new products, outreach and technology.

Why? Minorities � African-Americans, Latinos and other minority groups, including Asians, will account for much of the growth in under-age 55 households during this decade. Whites will still dominate the over 55 segment, but even there minorities will be well represented, Freddie Mac statistics show.

In fact, Nickerson said minorities will account for 65 percent of net household growth during this decade. Hispanic and Asian household growth will account for the largest share of that increase, and because they are younger, minorities will constitute a large part of first-time homeownership demand.

Minorities will become the majority of new homeowners � almost 60 percent of new buyers.

Between 1991 and 2000, an estimated nine million people from other countries legally immigrated to the United States, according to the Immigration and Naturalization Service.

Immigration continues to increase, even after the uncertainties created by the terrorist attacks on Sept. 11, with nearly 10 million expected arrivals during this decade. This will account for 27 percent of total household growth between now and 2010.

Hispanic household growth will be the largest contributor to this increase, with Mexicans leading the way.

In general, this group represents less wealth than the traditional homebuying market and their families are much larger. In the case of people from Mexico, while the homeownership rate in their native country is 80 percent, only 10 percent of all homes are financed.

In response to the opportunities offered by this market, Freddie has come with three new products � Mortgage Solutions for Immigrant Families, Lease Purchase Plus, which Nickerson calls a �21st century solution to credit and cash challenges, and Building Down-payment Grants, which is designed to improve marketability.

What Freddie Mac�s Mortgage Solutions product has done is to eliminate special requirements for lending to permanent and nonpermanent resident aliens, Nickerson said. Borrowers can be non-United States citizens who are lawful residents. There are no geographic limits on property, which are owner-occupied and one to two units. There is also a TLTV of 105 percent for purchase and refinance.

Income from boarders can account for up to 30 percent of a qualifying monthly payment. Throughout U.S. history, new arrivals have rented rooms from more established fellow countrymen as a way of becoming acclimated to their new home and to save money to bring relatives to the United States or send it as support for families back home.

The program allows cash on hand to be considered a source of funds and credit can be a 12-month history of non-traditional credit, Nickerson said.

Nickerson calls the 21st Century Lease-Purchase program both a credit solution and a down payment solution. Under the program, which is designed to help �no credit� and credit-impaired borrowers, no down payment is ever required.

Instead, a three-year lease period is used to demonstrate financial responsibility. It allows a family to convert to ownership through the assumption of a mortgage from a non-profit authority.

The Building Down-payment component is designed to improve the marketability of new construction, Nickerson said. In this program, home builders can contribute to the down payment on behalf of the buyer that is up to 3 percent of the home price.

Select lenders are being provided with this authority. Wells Fargo Home Mortgage is participating in this program, Nickerson said.

As far as education and outreach is concerned, Nickerson said that the best way to reach the new buyer is by thinking out of the box.

One way to increase buyers is by trying to help people avoid credit problems early in life so the problems won�t come back to haunt them when they go to by houses. While it is not impossible for those with a history of late or missed payments to buy a house, the credit-repair programs offered by counseling services can delay home purchases by several months to several years.

So Freddie Mac�s Credit Smart program is designed to help people learn how to handle credit from the start.

Freddie Mac is trying to use non-traditional methods of reaching the minority buyer, for example, through McDonald�s, and through consumer-oriented Web content. Nickerson said Freddie also is acting to fight predatory lending as a way to preserve homeownership.

New technology solutions introduced by Freddie Mac include enhancement of Loan Prospector, which have increased borrower acceptance, and CounselorMax, a new counseling management tool, Nickerson said.

I've seen a lot of "unique" financing programs come across my desk and most of them were simply warmed over and repackaged programs that have been on the market for quite a while. But not since the introduction of 100 percent financing have I gotten as excited about a mortgage product than one I saw this week from Freddie Mac.

Home Sweet Home Virginia is a new type of program that promises to become a nationwide product for Freddie Mac as partners line up with the proper support and funding. Basically, it's a lease-to-purchase program that helps low- to moderate-income buyers or purchasers with credit problems get into a house by first renting it and then converting the lease into a purchase.

Now, this isn't a new way of financing a house -- owners have been offering lease-to-purchase offerings for years. However, this is the first time a national money source -- Freddie Mac -- has lined up with other national partners to create such a program buyers can use for either a new home or existing house purchase.

Freddie Mac launched a similar $90 million program in California in September, 2001. Freddie Mac spokesperson Brad German says the program works well with housing agencies that have bond-issuing authority.

The original funds for these programs come from the issuance of bonds. The housing agency then works with the at-risk homebuyer to get him or her into the target property. Once they fulfill the 39-month lease, the deed and mortgage is then transferred over to the purchaser and Freddie Mac buys the loan on the secondary market, thus replenishing the funds for future purchasers.

The new program is "designed to help families with blemished credit, a lack of traditional credit, or a lack of funds for a downpayment to move into a new or existing home," according to Freddie Mac. All potential borrowers must participate in a borrower-counseling program provided by HOPE International, Inc.

The program is available from local housing agencies who can issue bonds to raise the initial funds. The Home Sweet Home, Virginia initiative is available to households who earn up to 140 percent of the area median income ($119,400 for a family of four) and meet the initiative's minimum underwriting requirements. To qualify, Lease-Purchasers must agree to complete the borrower pre- and post-purchase counseling program offered through H.O.P.E International.

The Virginia program will start in high-priced Fairfax County where new single family houses sell for more than $525,000 and new townhouses tip the pricing chart at $300,000-plus. This is to target homebuyers who are caught in escalating priced areas where generally only higher income purchasers can afford to buy in the area.

Interestingly, the initiative is coming from all over the state, but targeted at a few jurisdictions. The Harrisonburg Redevelopment and Housing Authority, based in the western part of Virginia, is issuing the bonds, but it's helping buyers across the Old Dominion. HOPE International, a nonprofit housing agency located in the Washington, D.C. suburbs, handles the mortgage applications while First Financial Equity and other lenders will provide the mortgages.

Neither the California nor Virginia program requires a downpayment, however, the purchaser must pay a commitment fee equal to 1 percent of the home's purchase price. Once the purchaser assumes the mortgage other costs associated with the purchase and loan assumption must also come from the buyer.

Freddie Mac has a good program here and hopefully housing agencies across the country will get on board. Housing agencies interested in forming a lease-purchase program should contact Freddie Mac at 703/903-2437 for details.

(Virginia buyers can call 703/267-5673 for application information. California residents can get more information on the East Bay-Delta Lease-Purchase Program web site or by calling 510/796-9257.)

With three out of every five first-time home buyers expected to be racial and ethnic minorities over the remainder of the decade, major suppliers of mortgage money are rolling out new products at a rapid pace so lenders can meet their borrower's needs.

Freddie Mac is eliminating a rule that requires borrowers to be U.S. citizens and is offering an improved version of the old lease-purchase program. Meanwhile, Fannie Mae is in the market with an interest-only loan that can save a buyer with a $150,000 mortgage almost $100 a month.

"We're entering an era of mass customization to meet the needs of underserved markets," Fannie Mae Chairman Franklin Raines said at the National Association of Home Builders' annual convention here last week.

"There will be a lot of ways to reach this new constituency," added Craig Nickerson, vice president of community lending at Freddie Mac.

Freddie Mac and Fannie Mae don't loan money directly to consumers. Rather, the two federally chartered financial institutions keep the funds flowing by purchasing mortgages made by local lenders and packaging them into securities that are sold to investors worldwide.

Nickerson told the convention that nearly 60 percent of all first-time buyers between now and 2010 will be young minorities and immigrants.

Nearly 80,000 builders and allied professionals attended the huge event, which spilled out into the parking lots of the World Congress Center at the top of International Boulevard.

Hispanic and Asian households will account for the largest share of the growth, according to Nickerson, as 27 percent of total household growth in the decade will come from immigration. Most of the Hispanics are expected to come from Mexico.

To reach permanent and non-resident aliens, Freddie Mac no longer demands that borrower be American citizens. Now, anyone who is a lawful resident of this country is eligible for a mortgage.

In addition, geographic restrictions on owner-occupied, one and two-family units have been removed. "We're changing our underwriting across the board, not just in certain areas," Nickerson said.

Freddie Mac also will now lend up to 105 percent of the value of the property, accept cash-on-hand (sometimes known as "mattress money") as a source of funds, and allow borrowers to use money from boarders as part of the income needed to qualify for the mortgage.

For credit-impaired borrowers with little or no cash, the company is improving on the old lease-purchase scheme by giving home buyers full credit for the monthly payments and allowing them to reap all the benefit of appreciation.

Freddie's 21st Century Lease Purchase program is both a credit and a downpayment solution, Nickerson said. "No downpayment is required, ever," he said. "And it helps borrowers who have serious credit issues or no credit standing whatsoever."

Under the program, a non-profit organization buys the house and leases it to the future owner at a rent that's close to the agency's mortgage payment. Then, after three years, the tenant assumes the mortgage as a 27-year loan and is credited with all equity that has accrued through appreciation and paying down the loan.

The lease-purchase loan is available now only in California and parts of Virginia, but the company plans to expand coverage nationally over the next two years.

For the first time, Freddie Mac also is allowing builders to contribute up to the 3 percent of the purchase price on behalf of a buyer. The company is still "not real comfortable" with permitting sellers to put up money for their buyers, but Nickerson said it is now willing to treat a grant from the builder as borrower cash.

Meanwhile, Fannie Mae has a new and innovative interest-only mortgage that allows home buyers to expand their purchasing power.

With the InterestFirst Mortgage, borrowers pay just the interest for the first 15 years of the mortgage, reported Howard Nelson, vice president of customization.

On a $150,000 mortgage at 7.125 percent, the buyer's payment would be $95 a month lower than it would be on a 30-year fixed loan of the same amount at 6.875 percent. But if the borrower decided to make a payment to principal, the next month's payment would be even lower.

As the loan amount increases, Nelson said, the savings would be even more significant: $126 on a $200,000 mortgage, $158 on a $250,000 loan and $190 on a $300,000 mortgage.

In last week's column, you read about the benefits and risks of owner-financed transactions from the seller's point of view. This week we'll examine how to structure an owner-finance offer from a buyer's perspective and some tips on successful lease-purchase arrangements.

Who needs seller financing? Most people think that it's for those who have damaged credit, or could not otherwise obtain conventional financing. That may be the case, and if indeed you have some credit issues that require seller financing, be prepared for the following terms.

If you simply have scattered consumer late payments (credit cards and installment debt), say more than 10 over the past 2 years, a lender may offer a mortgage rate 2 to 3 percent above market rates. Today, that would result in a mortgage rates of 8.5 to 10 percent. If you also have late rental payments, expect an even bigger hit.

However, there's a lot to be said for potential home buyers who have had late payments on other items but kept their sacred rental payment on time, every time. That can say a lot when it comes to explaining to a potential seller that "yes, there were some bad times, but we always paid our rent on time!" Be prepared to provide the seller both your rental agreement along with 12 months worth of canceled checks showing timely payment.

By being up-front about credit issues and demonstrating that negative items were due to a particular event, such as illness, loss of job or other catastrophe will go a long way -- especially if your rent was always paid on time. Another plus...if your new house payment is close to your rental payment you can make a case that you've established the fact that you can afford your new home, just as you afforded your rent.

But if your credit is excellent, why would you ever need owner financing? Sometimes the property itself is a concern, regardless of who the buyer is.

When a lender issues a mortgage loan, the lender attempts to justify the sales price by looking at similarly priced houses of similar size in the immediate area. Sometimes this doesn't happen because the structure is unique, say a log cabin, A-frame or geodesic home. Or, comparables may be difficult for a property located in a secluded area miles and miles from like structures or recent sales. If this is the case, then you may want to make a purchase offer with the seller financing all or most of the mortgage.

Would an offer with seller financing be attractive to an owner? No always. But what if financing from a conventional lender is unavailable and a buyer with cash is not to be found? In such circumstances, an owner "take-back" may be attractive.

If you can find a seller who will provide part of the financing, then lenders may be more easily convinced to provide either a first or second mortgage on such unique properties. Between financing from the owner and a loan from a lender, you'll need fewer dollars from your bank account.

Lease purchase plans can be a good idea for selected buyers who don't have enough money down for a conventional loan or who need some time to both save money and establish credit.

A lease purchase is an agreement between a buyer and owner under which the owner gets rent and the buyer has the right to purchase the property at a given price by a certain date. Lease purchases can be attractive for both buyer and seller, but the financing with many lease purchases is set up incorrectly, making them difficult to finance at the end of the lease period. To avoid the big pitfalls, follow these steps:

 

1. If part of the rent payment is to be set aside each month for a future down payment, the owner must agree not to commingle the funds. In other words, the seller should establish an "escrow" account specifically for your money. That way, when an underwriter reviews your loan application, there is no doubt as to whose money belongs to whom.

    

2. Is part of your monthly rent also going toward the downpayment? If yes, then the monthly payment must include your lease payment PLUS your extra money. Only funds above market rent may be included in your savings account.

What's the "market rent?" It's an amount determined by having an appraiser perform a market rent analysis at time of contract. Why? If you don't pay above and beyond market rent, then the seller is in effect "giving" you down payment money. While there may be exceptions, in the general case a conventional lender will only credit monthly rental funds to your downpayment if they are above the market rent.

A clean, no-questions-asked lease/purchase agreement could work like this: If the market rent in your area is $500 per month and you want $100 each month to go toward the down payment at the end of your lease, then your total payment would be $600 per month. Of this amount, the seller should put your extra $100 in an escrow account. Structured this way, you won't have a "savings surprise" when it's time to buy your new home.

The rules relating to lease purchase agreements vary by jurisdiction and such agreements can be complex. Both buyers and sellers are best served by each having an attorney review such agreements before either party signs and also by speaking with brokers and lenders.

It begins with subtle changes, some so minor that unless you were keeping close track, you wouldn't notice. But over time, there are a handful of ways to determine if the residential real estate market in your area is softening.

Properties Take Longer To Sell

You may not know how long it's taking the median-priced home to sell in your area. But you may notice that for-sale signs stay up longer and often go through one or two "sale pending" sign riders before the sign is removed from the property. It's not uncommon in weakening markets for sale times to extend by weeks or even months longer than in a brisk market. Your best source of information for your neighborhood is an agent who specializes in selling homes there and compiles data from the local Multiple Listing Service (MLS).

Additionally, if an agent is very up-to-date on market information, he or she should be able to provide information about the for-sale-by-owner properties. Even though not reported in MLS, FSBOs are often first to feel the crunch of a contracting market.

More Properties For Sale

It might have seemed like yesterday when there was a property shortage in your neighborhood and sellers were king! But additional inventory, especially during prime-time selling season, may indicate that too few buyers are buying and/or that sellers need to be more realistic about the prices they're seeking.

For example, prices in a softening market often need to be adjusted on a bi-weekly basis to stay on a par with properties that are selling. A seller who's not amenable to adjustments in listing price, terms, or incentives offered to buyers may find prospects few and far between as the market downturns.

The final blow comes when a prospect makes what the seller considers to be an "insulting offer" only to later learn that it was reasonable for market conditions and, unfortunately, the only offer she received.

More For-Sale-By-Owner Properties Crop-Up

For-sale-by-owner property -- FSBOs -- tend to be in full bloom during two types of real estate markets -- good and not so good. Why? The former is due to the fact that in a strong seller's market, there are often armies of qualified buyers and only a small number of properties available. That means that unless the FSBO is totally unreasonable in price and/or other conditions of the sale, even the marginally knowledgeable or ill-prepared seller will eventually get lucky and find a buyer.

In addition to good times, consider that when a previously-strong seller's market ebbs, FSBOs spring up like flowers after a spring rain. This is usually caused due to:

 

• The seller's belief that the house will be more financially attractive to buyers if the sales commission is eliminated which could, in turn, drop the asking price.

   

• A real estate agent's unsuccessful try at marketing the house, so the anxious seller tries to sell it himself.

In the next and final installment of this article, we'll explore two additional indicators that can signal a down turn, perhaps even a bumpy landing for your real estate market -- an increase in delinquent loans and foreclosures, coupled with contract terms that appear too good to be true.

In our next installment, we'll examine three additional subtle signals in your neighborhood that can indicate a market shift and softening prices.

Unless you currently have your home listed or are thinking of putting it on the market, it may not matter to you that signs of a softer real estate market are quietly seeping into your neighborhood. But it should, because even if you are not moving you ability to refinance or get a home equity loan may be impacted.

Take a look in your neighborhood. Are there more properties for sale than usual? What about the homes that have recently sold? Did they take longer to sell than in the past and if so, what concessions did sellers have to make to attract a buyer and make the sale?

But a softening real estate market is much more than fewer sales. The initial economic crunch starts with individual home owners who:

 

1. Are late paying their mortgage or miss payments entirely. First hit are owners with mortgage payments high in proportion to their monthly income, especially those with low or no savings to bridge a shortfall if a paycheck is missed or overtime shrinks. In times of economic downturn, many home owners find that they're dangerously one pay check away from foreclosure;

    

2. Find it tough if not impossible to bring delinquent payments current in order to save the property from foreclosure. As tough as it was to accumulate the down payment and closing costs for the initial home purchase, catching up hundreds if not thousands of dollars within a several-month time period may be impossible for many owners. The evidence then appears---yard signs declaring that HUD and other entities in the secondary market (like Fannie Mae are focused on recycling lender "REOs" (real estate-owned repossessions).

Once lenders find that defaulting loans are growing, they too become strong competition in order to move these non-performing assets off the negative side of their balance sheet into the "performing asset" category. Strong competition with lower interest rates and fewer closing costs attempt to lure what few buyers there are to these properties.

With all the competition in a market turning the focus from seller to buyer, one would think that bargains could abound for the patient, strategizing buyer. Unfortunately, all that glitters might not be gold. Sellers can offer terms too good to be true like low down payments (but high monthly costs), take over mortgage (because the property was bought with little or nothing down the remaining loan balance is worth more than the home), or lease purchase to grow your down payment gradually (but if you miss a payment the property can be reclaimed by the owner under some installment loan agreements).

The bottom line is that debt is still debt, no matter how flashy the terms sound. Low or no equity build-up coupled with first, second, and often third mortgages may tie some seller's hands, making any sale impossible unless the seller brings a check to closing. Of course, if the seller has the cash for a check, in many cases they wouldn't need to sell in the first place.

Prudent home owners and buyers alike know that a market shift is a time to weigh options carefully, not over-extend, and to gather all the facts prior to making any type of move even if it initially appears to be a positive one. Since there is no crystal ball to determine how deep, wide and long a shifting real estate market can be, we must rely on the time-tested strategies that have brought us this far---market trends, information, and a whole lot of common sense.

You're running out of time. The house hasn't sold and you need to be at your new job in less than one month. Should you lower the price? Rent the house? Instead, try lease purchase terms to entice a buyer!

Even though a lease purchase is often confused with a lease option, it's entirely different. A lease purchase is a true sale, but with a delayed but predetermined closing date often six months or more in the future. It works well when a seller needs to move but the house hasn't sold. It can also accommodate an otherwise strong buyer who needs time for their house to sell or to accumulate additional time on the job in order to qualify for a mortgage loan.

As with any sale, a purchase agreement is drafted and an earnest money deposit is taken. Should the buyer not close the purchase, any and all of the default provisions listed in the purchase agreement would apply (including loss of earnest money deposit). Since the buyer will occupy the house prior to closing, it's wise to obtain as much earnest money as possible. It serves as a motivator to close the sale and can help cover property repairs required prior to closing.

You need to determine how much you'd charge a buyer in monthly lease payments until closing. This can be just enough to cover your current mortgage payment, what similar properties like yours are renting for or equal to what the buyer's new payment will be once the sale is closed (another great motivator for the buyer to close!). Often in a lease purchase the seller will allow a certain amount of the buyer's monthly lease payment apply to lowering the sales price of the property or go to closing costs. 

While it's a great incentive to attract a buyer, but make sure that the buyer double checks with the lender to ensure that monthly credits can apply under the financing program he's seeking. Viewed as buyer incentives under some loan programs, the amount allowed may be capped or disallowed entirely.

Even though you're anxious to move, make sure that you (and ideally, a third party like a real estate agent) walk through the property with the buyer prior to his occupancy. Note the condition of the flooring, carpeting, and walls as well as the general condition of the home's exterior and yard. Also note any appliance or fixture that isn't working. Present a copy of your inspection notes to the buyer as well and have him concur by signing both copies. The walk-through will serve as a benchmark of the property's condition at the time you vacated and won't allow the buyer to later claim he wasn't informed about the condition of the house.

One last caution when using a lease purchase. Before you accept the contract, make sure that the buyer is pre-approved for the mortgage he needs to obtain. You'll also want the real estate agent and the lender to quote you the approximate amount of closing costs you can expect to pay at closing. Even though a lease purchase can sidestep having to rent the house, saddling yourself with a marginal buyer who can't qualify for financing could prove far worse (and more time consuming) in the long run.