A stiff belt for buyers: As some market conditions ease, others may get tougher in 2015. (John Ueland/For The Washington Post)

At the beginning of 2014, the federal government imposed stringent new rules that increased the ratio of income to debt that borrowers needed to qualify for a mortgage. But by year’s end, the government was allowing down payments as low as 3 percent and loosening other restrictions.

The rate for a 30-year mortgage rate hovered above 4.5 percent at the start of 2014. But by the end of the year, it had dropped below 4 percent.

So what can borrowers expect from the housing market in 2015? Will it be harder or easier for home buyers — particularly first-timers — to obtain a mortgage this year?

“Nothing is like a light switch to loosen up lending, but there’s definitely some opening up of the box for borrowers in terms of lower down-payment options,” says Anthony Hsieh, founder, chairman and CEO of LoanDepot.com. “Some recent rule changes and comments by Mel Watt [director of the Federal Housing Finance Agency] mean that the government and mortgage bankers are at least discussing moving in the proper direction and making it easier for borrowers to get a loan.”

The government seems to be operating on two tracks: This year, it is introducing another set of rules aimed at preventing the lax underwriting standards that spurred the housing crisis and Great Recession nearly seven years ago. At the same time, it is addressing concerns that lenders’ stringent standards may have led to a cooldown in the housing market by putting mortgages out of reach for thousands of would-be borrowers.

As part of the Dodd-Frank law aimed at shoring up lenders’ underwriting policies, the government a year ago introduced Qualified Mortgage (QM) regulations, which require that no more than 43 percent of borrowers’ gross monthly income can go toward their minimum monthly payment on all debt. Previously, lenders, who decided on their own what they felt the ratio should be, sometimes set the limit as high as 60 percent.

The law also imposed requirements on lenders to ensure that borrowers have the ability to repay their loans. Borrowers who default have the right to sue the lender for issuing the loan unless it meets QM standards.

The ability-to-repay rules put a premium on steady income, making it more difficult for self-employed individuals to get loans even if they have significant savings. In reaction to the law, lenders added another layer of requirements, such as higher credit scores.

Some are taking a step back, acknowledging that the changes last year may have changed the dynamic of the market.

According to the Mortgage Lender Sentiment survey conducted by Fannie Mae, the share of lenders who say they have tightened their credit standards during the prior three months dropped significantly, to 13 percent in the fourth quarter of 2014 from 28 percent in the first quarter. In other words, standards aren’t easing, but they’re not necessarily getting tougher, either.

While there was concern that the new standards would make it even harder for home buyers to qualify for a loan, “the punch line is that not a lot has changed since the rule went into effect,” says Erin Lantz, vice president of mortgages for Zillow. “Even before QM, the lending industry had already corrected practices that had contributed to the housing crisis.”

That same Fannie Mae survey showed a decline in the percentage of lenders who expected consumer demand to grow in the short term as well as a correlating increase during the year in the percentage of lenders who said they expected demand to decrease.

For instance, in the first quarter of 2014, 59 percent of lenders working with government-backed mortgages said they expected demand to increase, compared with 17 percent in the fourth quarter. In the first quarter, 6 percent said they expected demand to decline, compared with 22 percent in the fourth quarter.

The survey results could mean that consumers who have good credit are applying for mortgages and getting them, but that many people who know their credit record is shaky are self-selecting and staying out of the market. They could also mean that lenders began moving away from tight restrictions in an attempt to lure more customers back.

Credit remains unusually tight right now, says Rick Sharga, executive vice president of Auction.com. The obvious conclusion, he says, is that the QM rules have something to do with that.

“The only non-QM lending out there is in jumbo loans that are approved for extremely well-qualified borrowers,” Sharga says.

A second section of the legislation, known as the Qualified Residential Mortgage (QRM) rule, is designed to protect lenders. But it could benefit consumers, too, because it provides more clarity to lenders on the rules, which potentially makes them feel confident enough to expand their lending.

Approved last fall, the QRM rule goes into effect in October this year.

“The focus of QRM is risk retention, basically to make sure that lenders have some skin in the game,” says Lantz. “In the past, lenders didn’t have to consider the impact of a loan going bad because they immediately sold their loans and therefore didn’t have to be as careful making sure the borrowers were qualified.”

The new QRM risk-retention rules clarify that as long as the loans being made meet QM standards, lenders can sell their loans to investors without keeping any of the debt on their books. Lenders who make QM loans won’t need to raise capital to cover debt, which should result in more credit available to consumers.

Early in the debate about QRM, some regulators were advocating a 20 percent down payment requirement for QRM compliance. The outcry about that element of the rule resulted in an adjustment so that QRM now aligns with QM rules that do not specify any particular down payment. In the final QRM regulation, as long as a loan meets QM standards, lenders don’t have to keep any of it on their books. Lenders will be required to retain a 5 percent share of all non-QM loans for at least five years or until a majority of the loan has been repaid.

Fears says he anticipates very little impact on lenders from QRM and even less of an impact on consumers because of the alignment between QM and QRM rules.

“The QRM rules are going in the right direction and, hopefully, it will make a difference in making it easier for borrowers to qualify for a mortgage,” says Hsieh.

Lower down-payment loans

Late last year, Fannie Mae and Freddie Mac announced they will guarantee loans with a down payment of as little as 3 percent, compared with the previous minimum down payment of 5 percent, as long as one of the borrowers on the loan has not owned a primary residence within the past three years. This new loan program began Dec. 13 for Fannie Mae and will start on March 23 for Freddie Mac.

It’s too early to tell how many borrowers will take advantage of the lower-down-payment loans or how many lenders will offer these loans, but Fears says that some borrowers who would have chosen an FHA-insured loan may turn to these new conventional loans because they could have lower monthly payments, depending on the mortgage insurance premiums.

The program will be limited to fixed-rate loans, and borrowers will need to meet credit standards and prove they can repay the loans. Currently, VA loans and USDA Rural Housing loans are available with zero down payments; FHA-insured loans require a down payment of 3.5 percent, and some borrowers are able to make small down payments with special loan programs through their state or local housing authority or through a bank or credit union. Conventional loans from Fannie Mae and Freddie Mac were previously available with down payments of less than 20 percent, sometimes as low as 5 percent, but these loans, like the new lower-down-payment loans, require private mortgage insurance.

“There’s typically a bigger risk factor when someone makes a smaller down payment, so I would expect that the restrictions on who can qualify for a loan with a down payment of 3 percent would be tighter,” says Don Frommeyer, chief executive of the Association of Mortgage Professionals (NAMB). “Also, the cost of private mortgage insurance goes up drastically once you make a down payment of less than 5 percent, so it may not be that attractive to borrowers.”

Private mortgage insurance companies have been willing to do 3 percent down-payment loans for awhile now, says Fears, so this movement by Fannie Mae and Freddie Mac signals consumers that there are more opportunities for loans and encourages lenders to be more willing to take on a little bit of risk.

Sharga says that because FHA loans carry high mortgage insurance costs that increase borrowers’ monthly payments, low-down-payment conventional loans may be more affordable.

“I know some people worry about making the same mistakes as in the past with low-down-payment loans, but today’s loans are limited to responsible borrowers,” says Sharga. “There’s nothing specifically risky about a low-down-payment loan as long as the borrower has a high credit score and a low debt-to-income ratio. The problem before was that loans were approved for borrowers with little or no down payment, a high debt-to-income ratio and a low credit score.”

The discussion about guaranteeing low-down-payment loans is a realistic acknowledgment that saving for a larger down payment can be very difficult, especially for first-time buyers, says Lantz.

“As long as the underwriting of these loans stays conservative, the real estate market is well served by the option of a lower down payment,” says Lantz. “There’s definitely demand from consumers for other options besides FHA loans for a lower down payment loan.”

Loosening credit in 2015?

Lantz says she believes that lenders may loosen their standards a little in 2015 by allowing borrowers to make a lower down payment and approving borrowers with a lower credit score, but a vibrant non-QM market is years away.

“The biggest issue right now is that lenders are still concerned about being forced to buy back loans that go into default,” says Sharga. “No one is willing to take any risks right now because Fannie Mae and Freddie Mac have a huge market share and have been aggressive about forcing lenders to buy back loans. Reasonable underwriting, such as approving someone with a solid income, a low debt-to-income ratio and a large down payment who happens to have a lower credit score, just isn’t happening right now. I think clarity about buybacks could allow slightly riskier borrowers more of a chance of getting a loan.”

In late November, Fannie Mae and Freddie Mac announced changes that clarify the rules for buybacks and essentially encourage lenders to loosen their credit guidelines.

As the Federal Reserve prepares to discontinue its bond-buying program, economists have forecast that mortgage rates could rise to 5 percent this year. The conventional wisdom is that higher rates will make homeownership unaffordable for many borrowers.

But Sharga says higher mortgage rates could benefit consumers. He says that when interest rates rise, financial institutions may increase their level of lending in general and therefore justify taking on a little more risk. Frommeyer says that since loan originations are low, lenders might consider loosening their credit restrictions to generate more business.

Having standards and transparency in place can help lenders and will eventually lead to wider access to credit, says Lantz.

“I’m confident that the private sector will come back to mortgage lending, but not yet,” says Hsieh. “It may be six or seven years without much expansion in mortgage lending, but at some point the tide will turn again. Right now there’s a lot of chatter about making mortgages more accessible, particularly for first-time buyers, but I’m not sure about the speed of change.”

In the meantime, Lantz says consumers need to save as much as they can for a down payment, raise their credit scores, shop around for loans and get educated about the mortgage process.

Michele Lerner is a freelance writer.

Mortgage trends at a glance

Lower down payments: Minimum down payments for loans guaranteed by Fannie Mae and Freddie Mac are dropping from 5 percent to as low as 3 percent.

Higher mortgage rates: Mortgage rates dropped from 4.5 percent at the beginning of 2014 to 3.66 percent this week. But they are expected to rise to 5 percent by the end of 2015.

More income, less debt: Borrowers in 2015 will have to comply with the 2014 “Qualified Mortgage” rule requiring that no more than 43 percent of their gross monthly income can go toward their minimum monthly payment on all debt, including house payments. Previously, lenders determined the maximum debt-to-income ratios, some setting the limit as high as 60 percent.

Lower credit scores: While buyers still need to prove their ability to repay a mortgage and have a good track record in paying their debt, credit scores have slowly ticked down for approved borrowers.

Possibly more lending: A new “Qualified Residential Mortgage” (QRM) rule goes into effect in October, requiring lenders to keep a 5 percent share of mortgages on their books for at least five years unless the loans comply with the QM rules. Experts say the rule clarification could make lenders feel more confident about lending.