Mortgage Credit Standards Are Loosening, But Only For the Wealthy
The latest reports show that U.S. mortgage lenders have been easing their credit standards for loan applicants - well at least for the wealthiest customers, that is. For first-time buyers and those with any credit blemishes things have not gotten any easier.
Jumbo loan customers - those obtaining mortgages for more than the conventional loan limit of $417,000 - have seen mortgage standards loosen in the past year as banks have reduced down payment requirements for this attractive segment of buyers. Bank of America has dropped its minimum down payment to 15 percent from 20 percent on loans up to $1million. Wells Fargo did the same for all jumbo loans.
Jumbo loans have been one of the fastest growing mortgage categories over the past year, as the nation's wealthier buys have jumped into the housing market and as home prices have soared again in cities like San Francisco and New York. Mortgage lenders have also tried to court favor with jumbo loan borrowers with lower mortgage interest rates.
What about the rest of the market? The average credit score for accepted home loan applications has declined somewhat - government-controlled mortgage backers Fannie Mae and Freddie Mac are now buying mortgages from borrowers who have an average credit score of 752, a decrease from 758 a year ago. The Federal Housing Administration also saw a drop in the average credit score associated with their loans, falling to 686 from 697.
While those declines may look significant at first glance, when they are taken all together - between the three entities they guarantee 80 percent of the mortgage market - the average credit score is at 730, an almost negligible change from the previous year and much higher than the 700 average from during the housing bubble period.
As the FHA has instituted higher lender fees this past year, more business has gone to Fannie and Freddie. According to a new study from the Urban Institute, this is why the credit score decreases are essentially a wash. "The FHA is losing borrowers at the higher end of its credit score spectrum and lowering its average credit score," the analysis said. "[Government Sposored Entities's Fannie and Freddie] are absorbing borrowers at the lower end of their credit spectrum, also dragging their average score down."
No one wants to see credit standards slip back to where they were before the housing crash, but impossibly high standards can also be harmful to the market. A recent Merrill Lynch report found that 86 percent of first-time homebuyers use financing to purchase their home. Tight mortgage standards are definitely one of the main issues holding back many would-be first-time buyers at this point.
Things may have to change in the near future if mortgage lenders want to keep up their home loan volume. The number of refinances has dropped off dramatically in the past year as rates have ticked upward. Total mortgage originations are expected to fall 36 percent in 2014 to $1.1 trillion, according to the Mortgage Bankers Association, with most of that decrease as a result of fewer refinances.
"Credit is loosening, but it is loosening from a tight starting point," said Michael Fratantoni, MBA chief economist. He added, "with [mortgage] volume dropping as much as it has, many lenders are looking to expand their credit box."
In order to entice customers away from competitors, some lenders may have to start offering lower down payment credit score requirements to even their non-jumbo loan clients.