Easing of Credit Requirements

Signs of an easing of credit requirements are surfacing

By Kenneth R. Harney

September 20, 2013

WASHINGTON – Could the end of the refinancing boom be stimulating
slightly more favorable mortgage terms for home buyers? The latest
comprehensive study of activity in the market suggests the answer could be yes.

Ellie Mae Inc., a mortgage technology firm in Pleasanton, Calif.,
conducts a survey involving a massive, nationally representative sample of
loans closed each month. Its August findings point to a gradual easing on
credit scores for borrowers.

Consider these hard numbers provided by Ellie Mae Chief Operating
Officer Jonathan Corr:

  • Last month, 30% of all successful
    applicants for home mortgages had FICO credit scores less than 700,
    compared with 15% a year earlier. That doubling in just 12 months is
    significant and tells prospective buyers: Just because you don’t have
    stellar scores, you can still be approved if your application shows
    compensating strengths such as steady income, solid recent payment
    performance on credit accounts, moderate household debt loads and adequate
    financial reserves in case you run into a rough patch. (FICO scores run
    from 300 to 850; higher scores signify a lower risk of default for the
    lender.)
  • Average FICO scores are down across the
    board. Conventional Fannie MaeFreddie Mac
    scores for approved applicants dropped a point from July to August to 758.
    That’s still high in historical terms but down from 764 in November. Federal Housing
    Administration
    -insured loans for buyers continued their slow
    decline, hitting 695 last month versus 702 in April 2012. The biggest
    drops in scores have been on Fannie-Freddie refinancings as recent
    interest-rate jumps have scared away applicants. Approved borrowers in
    August had average scores of 737 compared with 746 in July.

Corr said in an interview that many lenders are seeing refi
applications decline sharply, and this may be pushing them to be more flexible
and competitive on loans for home purchases.

One example of a major lender loosening up a little: Wells Fargo Home Mortgage
has relaxed its minimum down-payment requirement on so-called jumbo mortgages,
those with starting balances above the Fannie-Freddie conventional limit of $417,000.
Rather than its previous minimum of 20% down, Wells is now accepting 15% on
primary residences “in most markets around the country,” company
spokesman Tom Goyda said. There is no mortgage insurance requirement, but
applicants must have a minimum 740 FICO score, no higher than a 35% total
household debt-to-income ratio and 12 months of financial reserves available to
them. Essentially, Wells Fargo is saying: If you are a strong candidate on most
criteria, we’ll give you the benefit of the doubt and lower the amount of cash
you need to bring to the table.

Some mortgage companies say that for well-qualified applicants
they can go one step better. Paul Skeens, president of Colonial Mortgage Group
in Waldorf, Md., says that he can arrange jumbos with 10% down payments: A
standard first mortgage and an accompanying second mortgage or deed of trust
that in combination create a 90% loan-to-value ratio for the borrower.

But not everybody in the mortgage market is seeing an easing
trend.

The Mortgage Bankers Assn. has reported a slight tightening of
lending conditions. The reason: Fewer lenders are offering specialized products
such as interest-only mortgages and loans with terms extending beyond 30 years.
Both of these features render loans ineligible for the federal “qualified
mortgage” designation that is scheduled to go into effect nationwide in
January.

Other banned types: Loans with negative amortization, balloon
payments and adjustable rate mortgages underwritten at teaser interest rates.
Fannie Mae and Freddie Mac have announced that they will not invest in or
guarantee loans that are not qualified mortgages.

“I don’t see any easing in lending,” said Bruce
Calabrese, president of Equitable Mortgage Corp. in Columbus, Ohio. He cited FHA’s
increases in mortgage insurance premiums and Fannie Mae’s recent cancellation
of its 3% minimum down payment program as troubling signs for borrowers.

Bottom line here: Credit score requirements are definitely more
flexible than a year ago, and jumbo loans might require less cash out of
pocket. But we’re still in a highly restrictive market compared with seven or
eight years ago near the peak of the boom.

Source: Los Angeles Times

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