Discount mortgage rates could become reality for thousands of underserved borrowers after the announcement this week that both Citigroup and Bank of America Corp. will provide mortgages at considerable savings to assist borrowers with low incomes or tainted credit histories.
The announced discounts are larger than what the two banks offer on fixed-rate mortgages to their most sought-after customers who have high credit scores, substantial assets and large down payments.
Bank of America described its outreach “as part of [its] ongoing efforts to provide homeownership opportunities for qualified customers.” Similarly, Citigroup said its program reflected its ongoing commitment to promote affordable homeownership.
The announcements come in the wake of record settlements that Bank of America ($16.65 billion) and Citigroup ($7 billion) reached with the Department of Justice and other government regulators over the selling of toxic mortgage securities that in part precipitated the 2008 financial meltdown. Part of the settlements include payment forgiveness, agreeing to short-sales (in which homeowners owe more on their properties), and making discounted loans to low-income borrowers.
How the discount mortgage rate program works
The Neighborhood Assistance Corp. of America (NACA), a national nonprofit in Boston, Mass., primarily known for assisting low- to moderate-income borrowers, will originate and underwrite the discount loans on 15-year mortgages and Bank of America and Citigroup will keep them on their books.
Under the discount mortgage rate program, borrowers don’t need a down payment. Nor will their credit scores impact their eligibility. In fact, they can qualify for a mortgage one year after a default or other adverse credit event. Borrowers also don’t have to pay closing costs.
The NACA, however, conducts exhaustive reviews of applicants’ payment histories and requires extensive income and asset documentation. NACA also provides housing counseling to borrowers.
NACA CEO Bruce Marks, who helped negotiate the Bank of America and Citigroup mortgage-assistance programs and other similar programs in the past, said that since 2006, the foreclosure loss rate on just over 18,000 purchase loans originated and distributed by NACA is close to 0 percent.
The “discount” portion of the program centers on mortgage points. These are upfront fees that borrowers typically pay if they want to reduce the interest rate on the the life (term) of their loan. Traditionally, if a borrower pays one mortgage point, he or she will receive a discount of 0.25 percent in the mortgage rate. However, under the new assistance program, Citigroup and Bank of America will offer a 0.5 discount for a single mortgage point, again a deal far better than someone with the most pristine credit would receive.
Discount mortgage rate comparisons
When the announcement was made, the interest rate on NACA’s 15-year fixed mortgage was 3.25 percent. But if a borrower decided to take full advantage of the mortgage points, he or she could take out a mortgage as low as 0.125 percent for the life of the loan.
The savings reduction is dramatic. A $100,000 loan at 3.25 percent for 15 years would result in monthly payments of $702. The same loan at 0.125 percent would result in payments of $560 or $141 less each month or a 15-year savings of $25,534.
If the borrower qualified for a $200,000 loan, payments would be $1,405 at 3.5 percent and $1,121 at 0.125 percent for a monthly savings of $283 or $51,079 over the life of the loan.
If you believe you don’t qualify for this program, don’t despair — you can still find competitive rates by going to our mortgage section for the latest updates and further help in choosing and financing a home. Also, don’t fail to consider your local lender’s loan programs for low-income borrowers. The mortgage units of Bank of America, Citigroup and many other lenders offer strong FHA loan programs, which are ideally suited for lower-income borrowers with subprime credit.
For making more interest rate comparisons, consult MyBankTracker’s mortgage calculator below.
Opportunities have arrived not a moment too soon
Timing for these discount mortgage rates couldn’t be better in the wake of new Home Mortgage Disclosure Act (HMDA) data, also released this week by the Urban Institute, showing how credit and financing opportunities have worsened for African American and Hispanic households after the real estate bust.
In their report, Lending Boom and Bust for Minorities, based on HMDA data, authors Bing Bai and Taz George stated that from 2005 to 2012, the share of loans made to African Americans and Hispanics plunged from 23 percent to just 12 percent.
“As a result,” the authors said, “these communities have found it harder to take advantage of low home prices and interest rates that followed the housing market crash, missing an opportunity to build wealth through homeownership.”
In San Francisco and San Jose, Calif., the data was even worse for African Americans and Hispanics whose share of mortgage originations fell from about 76,000 mortgages (nearly 28 percent) in 2005 to about 19,000 mortgages in 2012 (8 percent). The numbers were equally dismal in other big cities like Los Angeles, Miami and Detroit.
After reporting the data, Bai and George concluded, “We know credit is still tight and that tightness has been particularly hard on these same minority communities.”
To learn more about NACA’s mortgage programs, and how you might apply or qualify, visit the nonprofit lender’s site (naca.com). The Boston-based community advocacy and homeownership organization has more than 30 offices across the nation.