OpinionMortgage

Are lending standards really easing?

What's going on?
  • News reports might accurately reflect trends for refi mortgages or mortgages as a whole, but not for purchase loans -- mortgages to buy houses -- which is the focus of most of the public concern about standards.
  • We are deep into the best market for home sales in nearly a decade, and the latest hard data shows that it is just as difficult to qualify for a purchase mortgage in July as it was last March -- or even in March 2012.
  • At the top of the list of first-time homebuyers' challenges is overcoming the disinformation generated about what's going on in the backrooms of underwriters.

Perhaps you have heard that it’s getting easier to get approved for a mortgage to buy a home. The first-time buyers you work with don’t seem to be doing any better than they did six, 12 or even 24 months ago.

The news reports you’ve been reading are misleading. They might accurately report trends for refi mortgages or mortgages as a whole, but not for purchase loans — mortgages to buy houses — which is the focus of most of the public concern about standards.

What’s going on?

Four months ago, I published an article titled “Why lending standards won’t get better.”

“Today’s lending standards were written to protect lenders and federal budgeters, not to help renters become homeowners. Despite pressure from the public, lending standards probably won’t change much more in the foreseeable future than they already have,” I wrote at the time.

I’m sorry to say, it looks like I was right. We are deep into the best market for home sales in nearly a decade. And the latest hard data shows that it is just as difficult to qualify for a purchase mortgage in July as it was last March — or even in March 2012.

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Reports that looser standards are making it easier to get a mortgage are of two types.

Some are simply surveys of lenders or experts, such as the Federal Reserve’s quarterly Survey of Senior Loan Officers or Pulsenomic’s survey of real estate economists and experts.

Both made headlines in recent months by announcing access to credit has eased or is easing. Both are based on perceptions, expectations and attitudes, not on hard data.

Others, such as the Mortgage Bankers Association’s Mortgage Credit Availability Index, combine purchase loans with refis to provide a picture of credit accessibility that’s virtually useless for a discussion of home purchases and the barriers facing first-time buyers.

The fact is that standards for refis are indeed significantly lower, while standards for purchase loans have been virtually frozen for years.

For example, median FICOs for conventional closed refis in July were 727, for conventional closed purchase loans 757 — a 30-point difference. Combining data on the two different uses hides what is going on to purchases loans.

Standards for refis have loosened much more for refis than for purchase loans. A good way to measure the difference between standards used to make lending decisions is to review and compare the real-life results of those decisions.

Below is an update of a table I included in my May article expanded to include July 2015 and refi data, for comparison purposes. It includes data on closed loans for the two most popular categories of mortgages for homebuyers, FHA and conventional loans.

The data come from Ellie Mae, the industry-leading mortgage processing platform, which processed approximately 3.7 million loan applications in 2014.

How lending standards differ for conventional and FHA refi and purchase loans

March 2012-July 2015

 

 

Loan Type/Standard

 

March 2012

 

March 2015

 

July 2015

 

Percentage improvement, March 2012-July 2015

Conventional Purchase Loans
FICO 764 755 757 1%
LTV 79 81 80 1%
Back end DTI* 33 34 34 2.9%
Conventional Refi Loans
FICO 771 742 727 6%
LTV 65 70 70 8%
Back end DTI* 32 37 40 25%
FHA Purchase Loans
FICO 701 685 689 1.7%
LTV 96 95 96 0
Back end DTI* 41 41 41 0
FHA Refi Loans
FICO 724 685 660 8.8%
LTV 88 85 82 6,8%
Back end DTI* 39 41 41 5.1%

Average FICO scores, loan-to-value ratios and debt-to-income ratios from Ellie Mae Origination Insight Reports

Over the past 16 months, the three critical metrics used to show the impact of lending standards — FICO scores, loan-to-value ratios and debt-to-income ratios — have barely changed, while refis have indeed become measurably more accessible to borrowers.

Why this is happening is open to speculation. Perhaps lenders are kinder to refi applicants because refis are easier to originate than purchase loans. Or refis might be easier to sell to investors because the risk is lower for borrowers with years of homeownership and histories of making mortgage payments.

With interest rates on the rise and the refi business shrinking, loosening standards might be a way to attract borrowers before rates rise even higher.

The percent share of first-time buyers fell to 28 percent in July, far from the traditional 40 percent and the lowest share since January, declining in July for the second consecutive month, falling from 30 percent in June to 28 percent.

A year ago, first-time buyers represented 29 percent of all buyers. There is clearly no evidence that a loosening in lending standards is helping first-timers because standards have loosened even one notch on the belt for them.

“The fact that first-time buyers represented a lower share of the market compared to a year ago even though sales are considerably higher is indicative of the challenges many young adults continue to face,” said Lawrence Yun, chief economist for the National Association of Realtors.

At the top of the list of their challenges is overcoming the disinformation generated about what’s going on in the backrooms of underwriters.

Steve Cook is editor and co-publisher of Real Estate Economy Watch and provides communications consulting services to leading real estate organizations. Visit him on LinkedIn and Facebook.

Email Steve Cook.