Could the end of the refinancing boom be stimulating slightly more favorable mortgage terms for homebuyers? The latest comprehensive study of activity in the market suggests the answer could be yes.
Ellie Mae, a mortgage technology firm based in Pleasanton, Calif., conducts a widely regarded survey involving a massive, nationally representative sample of loans closed each month. Its August findings, released this week, point to a gradual easing on credit scores for borrowers.
Consider the hard numbers provided by Ellie Mae president and chief operating officer Jonathan Corr.
Last month, 30 percent of all successful applicants for home mortgages had FICO credit scores below 700. A year ago, by contrast, just 15 percent had scores below the 700 mark.
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 — 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 Mae-Freddie 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 last 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, where 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 has relaxed its minimum down-payment requirement on so-called “jumbo” mortgages with starting balances above the Fannie-Freddie conventional limit of $417,000. Rather than its previous minimum of 20 percent down, Wells is now accepting 15 percent on primary residences “in most markets around the country,” according to spokesman Tom Goyda. There is no mortgage insurance requirement, but applicants must have a minimum 740 FICO score, no higher than a 35 percent 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, CEO of Colonial Mortgage Group in Waldorf, Md., says that he can arrange jumbos with 10 percent down payments: A standard first mortgage and an accompanying second mortgage or deed of trust that in combination create a 90 percent loan-to-value ratio for the borrower.
But not everybody in the mortgage market is seeing an easing trend. Last week, the Mortgage Bankers Association reported a slight tightening of lending conditions in its survey. 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” (QM) 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 with non QM features in 2014.
Other lenders question whether, with the forthcoming tougher standards on debt-to-income ratios on QM loans motivating mortgage investors to play it safe — now, rather than waiting for January — anyone can seriously talk about easing.
“I don’t see any easing in lending,” said Bruce Calabrese, president of Equitable Mortgage Corporation in Columbus, Ohio. He cited FHA’s increases in mortgage insurance premiums and Fannie Mae’s recent cancellation of its 3 percent 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.
Kenneth Harney is a syndicated real estate columnist.