Mortgage credit slowly loosening, but many restraints still in place
by Broderick Perkins
(4/2/2013) The average credit score lenders require for a home loan is falling. Likewise, the average down payment on closed home loans is down and mortgage borrowers can devote a larger share of their income to debt.
A recent report reveals some loosening of mortgage underwriting requirements, but the changes are incremental.
What's more, the report gets mixed reviews from experts with boots on the ground who indicate there's been little impact on the overall mortgage lending market.
"I believe mortgage underwriting has eased and it will get easier as fear of real estate prices spiraling down goes away. The fear was we had this crisis and no one knew how long it would last," said Robert Aldana, publisher of Silicon Valley's Let's Talk Real Estate.
"Now we can see the rebound and prices are going up. Lenders know the risk factor is lower today than it has ever been, because we have hit the bottom and have no where to go but up," added Aldana, also a real estate agent with Intero Real Estate Services in San Jose.
Joel Spolin, president of SpoLoan Mortgage Banking in Palo Alto agrees the housing market is recovering and, with greater equity, more homeowners have a shot at refinancing, but not because of eased underwriting rules.
"I had three or four clients I was working with last year that did not have enough equity to refinance. With the increases in value that I have seen over the past six months, all of a sudden there is enough equity to refinance. That is not looser guidelines, it is the market making it easier for some borrowers to qualify for loans," said Spolin.
Looser mortgage underwriting
Ellie Mae, a publicly traded software and solutions company for the residential mortgage industry, recently released "Origination Insight Report" which shows slightly easier mortgage underwriting rules — for now.
Ellie Mae found:
The average FICO credit score on closed loans dropped to 745 in February, down from 749 in January and down from 750 a year ago. The 745 score was the lowest average score since May 2012.
The average down payment was 20 percent in February, down from 21 percent in January and 24 percent a year ago. The February number was the first time the average down payment dropped to 20 percent since July 2012.
The average percentage of total income lenders allowed borrowers to devote to debt payments was 35 percent in February, up from 34 percent in January and 34 percent a year ago, revealing how tight the "easing" has been.
Looser, tougher underwriting
Some experts say mortgage underwriting is like an animal with two heads - going nowhere fast.
"OK, so in some ways requirements for getting a mortgage are easing up, but in other ways they are being more restrictive," said Chip Poli, CEO of Poli Mortgage Group, Inc. in Norwood, MA.
"They are definitely allowing for more flexibility when it comes to LTVs and FICOS, however they are being more restrictive in regards to guidelines and documentations. Lenders are putting rules in place as to the limits on large deposits before the borrower has to document them, including debt to income (DTIs) ratios, requirements for tax returns, etc. Compliance and proper documentation and forms are more restrictive than ever," Poli added.
Becki Saltzman, a former real estate veteran and author of the upcoming fall 2013 book, "Arousing the Buy-Curious: Inciting Insights of the Real Estate Kind," says underwriting guidelines are easing, but as long as lenders have to wrangle with regulatory reform, the changes will remain small.
"Underwriting guidelines have gotten a wee bit looser. However, now in addition to brokers having to just babysit borrowers, they now also have to run daycare businesses for title folks, escrow officers, appraisers, and each other. Until regulators figure out who needs to parent whom, we won't know how these numbers will play out in the future," Saltzman said.
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