Wednesday , 10 August 2016
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The Truth about Lending Standards


Perhaps you have heard that it’s getting easier to get approved for a mortgage to buy a home. Yet 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 may accurately 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?

Six 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.

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

Some are simply surveys of lenders or experts, like 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, like 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 really 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 home buyers, 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 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 may be easier to sell to investors because risk is lower for borrowers with years of homeownership and a 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 they rates rise even higher.

The percent share of first–time buyers rose to 32 percent in August, up from 28 percent in July and matching the highest share of the year set in May but far from the traditional 40 percent share that first-time buyers enjoyed for years. A year ago, first–time buyers represented 29 percent of all buyers. However, there is no evidence that a loosening in lending standards is helping first-timers.




  1. You present some interesting stats and perspective - thank you for the article.

    Maybe too basic here, but “taking the shot” anyway.

    (the article states) “Why this is happening is open to speculation”

    In the general sense, is there any need for speculation?
    When interest rates are very low, there is low profit from mortgage loans.
    This also means that there is less room for risk, so borrowers with lesser down payments and lesser FICO scores face restricted loan access.

    When rates rise and financial institutions have more “spread”, they can increase risk profiles - meaning an increase of borrowers with less pristine credit rating and lower down payments. (there are funds available to offset the increased possibilities of loan default).

    One way to look at causation is that US Government (or Treasury) low interest rate policy is restricting all mortgage credit, and there’s not much financial institutions or borrowers can do to increase lending, until that “fact” changes.

    Financial institutions have been taking “heat” for several years on their “tight lending standards”. Recently, perhaps as a PR “counter” to this criticism, various lenders have publicized “relaxed lending standards”, and some have quoted acceptance of FICOs down into the 600s range. However, what has occurred in fact, is that agency mortgages (by far the majority loan type) average FICO scores have increase from ~740 to over 750. This suggests that, for every loan being written on a lower FICO score, there are far more offsetting loans written on higher FICOs. The net is that current statements about loosening credit do not hold water, and probably increase the frustration level for a large group of potential homeowners.

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