Lenders not easing mortgage standards
WASHINGTON — With 30-year mortgage rates hitting new lows and recent borrowers' payment performance the best by far in decades, you'd think that banks and lenders might be loosening up on their hyper-strict underwriting standards.
But new national data from inside the industry suggest this is not happening. In fact, in some key areas, standards appear to be tightening even further, and the time needed to close a loan is getting longer.
The average FICO credit score on all new loans closed in August was 750, nine points higher than a year earlier, according to Ellie Mae Inc., a Pleasanton, Calif.-based mortgage technology firm whose software is used by many lenders. The sample represents about one-fifth of all new loans — roughly 2 million mortgages.
At Fannie Mae and Freddie Mac, the average FICO score was even higher. For refinancings in August, the average approved borrower had a 769 FICO score, up six points from August 2011. The average score for borrowers purchasing homes was 763, one point higher than the year before.
FICO scores are used by virtually all mortgage lenders to gauge the credit risk posed by a borrower. Scores range from 300 to 850, with low scores representing higher probability of default, high scores indicating low risk. Fair Isaac Co., developer of the scoring model, says 78.5 percent of all consumers currently have scores between 300 and 749. Barely one in five, in other words, scores high enough to meet today's averages at Fannie and Freddie.
Other signs of how strict standards have become:
• The average purchaser using a Fannie-Freddie loan made a down payment of 21 percent in August and had a squeaky-clean debt-to-income ratio — with total monthly debt payments, including the mortgage — amounting to just 33 percent of income. Refinancers had an average equity stake in their houses of 30 percent.
• In August, according to Ellie Mae's survey, the average FICO score for Federal Housing Administration (FHA) refinancers was 717, up 11 points from the year earlier. FHA home purchasers had average scores of 700 — four points below what they were 12 months ago — but still far beyond historical norms. FHA officially accepts FICOs as low as 500 and requires 10 percent down payments for borrowers below 580 but does little business at these score levels.
• In addition to — or maybe because of — the tougher standards, the mortgage process itself appears to be slowing down. The average time from application to closing for all loans during the time cycle in the Ellie Mae survey was 49 days, nine days longer than the previous August. For refinancings, the average processing time was 51 days, up from 37 days a year earlier.
What's going on here? Given the Federal Reserve's repeated interventions to lower the cost of money to banks, why are they keeping their credit requirements so high? Are there any prospects for relief for prospective buyers who simply don't have 20 percent or 30 percent to put down and don't have elite-bracket FICO scores?
Doug Duncan, the chief economist for Fannie Mae and former chief economist for the Mortgage Bankers Association, acknowledges that big banks — and Fannie and Freddie — are seeing their highest-quality "books of business" in decades, thanks in large part to their strict credit standards and documentation rules.
He believes, however, that the underwriting cycle could start to loosen as banks begin to pare down their pricing add-ons, their fears of costly "buy backs" of existing loans recede, and rules on mortgage lending are unveiled by the government.