Monday, September 12, 2016

Why Isn't It Easier to Qualify For A Mortgage?

The Mortgage Corner

It’s not getting any easier to obtain a mortgage. This is in spite of record low mortgage rates, as low as 3.0 percent for 30-year conforming fixed rates; as well as the appearance of so-called Alt-A, non-QM mortgages with 3 to 7 year, interest only, fixed rates that require 12 months personal bank statements to verify income.

According to a report from the Urban Institute that tracks mortgage availability among other housing issues, the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more “normal” lending period of 1999 to 2003, when less than 2 percent of the loans defaulted after 10 years.

By comparison, 12 to 13 percent of the mortgage loans made at the height of the housing bubble between 2006 and 2007 defaulted within 10 years of their origination, the Urban Institute said in August, citing Fannie Mae’s data. And that was mostly due to the Great Recession and loss of some 8 million jobs.

The Urban Institute noted that of Fannie Mae- and Freddie Mac-backed loans made after 2011 and through the first quarter of 2015, 69 percent of the borrowers had FICO scores better than 750. Between 1999 and 2003, only a third of people with such mortgages had a credit score that high. Less than 1 percent of loans that have been made after 2011 have defaulted, according to Fannie Mae’s data, the Urban Institute said, even for those borrowers with FICO scores under 700

Requiring higher credit scores is just one way lenders have made it more difficult to qualify. Fannie and Freddie also pile on points for scores above 680, which was a normal mid-score before the housing bubble, and in effect boosts the interest rate. For instance, just a 1 pt. cost add on for a score below 700 is the equivalent of a one-quarter percent raise in the rate.

Other problems are due to the reforms mandated by Dodd-Frank designed to protect consumers from predatory lenders, while a good idea, have made it much more difficult for lenders and slowed down the qualification time. This includes additional delays in closings for the slightest change in rates or points enacted due to the new TRID requirements (short for TILA/RESPA Integrated Disclosure) enacted last fall.

This has made lenders much more selective in granting mortgages. We are probably back to 1980s qualification standards when many fewer loans were granted—mostly by S&Ls that disappeared after the late 1980s banking scandals.

We are in a much better position today, 7 years after the Great Recession, in other words. The inventory of loans in negative equity positions dropped by 31 percent (1.5 million) in 2015, according to Black Knight. At a total of 3.2 million, or 6.5 percent of all homeowners with a mortgage, this represents significant improvement from the peak in 2010, but is still well above “normal” levels.

 Both the S&P Case-Shiller Home Price Index and Corelogic stats show home prices rising as much as 10 and 11 percent in Portland and Seattle, respectively, in its latest 3-month averaged, same home survey, and 5-6 percent nationally on average.  This will continue to bring back housing values and lower negative equity in homes.
So there’s no reason to continue to be as cautious as mortgage lenders are today.  There is of course the political brouhaha over whether Fannie and Freddie should become private corporations again, and so separated from US Treasury control.  With their future unclear, these entities that guarantee more than 60 percent of all mortgages make lenders doubly cautious about qualifying younger, entry-level borrowers, in particular.

Harlan Green © 2016

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