Wells Fargo & Co., the biggest U.S. home lender, two weeks ago
cut its minimum credit score for borrowers of Fannie Mae- and Freddie
Mac-backed loans to 620 from 660. The step followed moves by smaller
lenders, such as the U.S. unit of Canada's Toronto-Dominion Bank, which
lowered down payments to 3% without requiring mortgage insurance for some
loans. The impact of these moves points to a couple of factors in the market - one, that banks like Wells Fargo are looking to broaden their portfolio horizon; the other is that these banks might have increased confidence in the economy.
Banks ratcheted up borrowing requirements after the most
severe housing crash since the Great Depression, preventing as many as
1.2 million loans from being made in 2012, according to an Urban
Institute paper. Lenders rode a wave of refinancing until a spike in
borrowing costs last year gutted demand, forcing the biggest banks to
cut more than 25,000 mortgage jobs. Now they're removing barriers to
mortgages for some borrowers in hopes of reviving a shrinking market.
"We
threw the baby out with the bathwater because we had to," said Rick
Soukoulis, chief executive officer of San Jose, Calif.-based lender
Western Bancorp. "From there, you start to inch back. If you keep
selling only what isn't selling, you're just dead."
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| Lowering standards - good for home buyers. Hope it does not go to new lows !! |
In March,
credit standards were the loosest in at least two years, according to a
Mortgage Bankers Association index. The measure, based on underwriting
guidelines, rose to 114 from 100 when it started in 2012. The index
would have been at about 800 in 2007, meaning credit was eight times
looser that year, before standards were tightened.
Home buyers
with higher debt and lower FICO credit scores are now a growing minority
among borrowers of loans backed by Fannie Mae and Freddie Mac, the
government-owned mortgage giants.
Almost 16% of the mortgages for
home purchases in March went to borrowers with monthly debt obligations
exceeding 43% of their pay, according to data compiled by Morgan
Stanley. That's up from 13.4% in mid-2012. Federal rules deployed in
January expose lenders to liabilities if their mortgages without
government backing require payments that, when combined with other
debts, exceed 43% of the borrower's income, without proof they can be
repaid.
More than 23% of the mortgages in March went to property
buyers with credit scores less than 720, an above-average measure on
Fair Isaac Corp.'s scale that ranges from 300 to 850. That's an increase
from 15.6% in mid-2012, according to Morgan Stanley.
After
housing values collapsed in 2008, banks raised their credit standards to
the highest level in more than two decades. By 2011, the average credit
score of an approved mortgage reached 750, according to mortgage
processor Ellie Mae. Fannie Mae required only a score of 620 after
raising its minimum from 580 in 2009.
"The pendulum swung too
far," said John Taylor, CEO of the National Community Reinvestment
Coalition, a Washington-based organization that brings credit and
banking services to middle- and low-income consumers. "They
over-tightened the standards to the point where qualified borrowers
couldn't get access to credit."
The banks boosted requirements
partly to stem the costs of having to repurchase soured mortgages. As
defaults soared, Fannie Mae and Freddie Mac used a clause in their
purchase agreements that let them return loans to lenders if they went
bad after faulty underwriting.
In 2009, Fannie Mae asked lenders
to buy back $12.4 billion of mortgages, according to a regulatory
filing. The number soared to $23.8 billion in 2012, eating into banks'
earnings, before dropping to $18.5 billion last year, according to
filings.
Franklin Codel, head of production for San
Francisco-based Wells Fargo, said clearer communication with Fannie Mae
and Freddie Mac about underwriting rules is now allowing the bank to
widen credit availability.
"We have more confidence that should
the loans go into default we've done our job properly and we aren't
going to get a repurchase," Codel said.
While Fannie Mae and
Freddie Mac borrowers with lower credit scores must prove the ability to
sustain homeownership, Wells Fargo will look for "compensating factors"
to close the loan, Codel said. That may include requesting an
explanation of a credit history event, reviewing the strength of income
and the stability of employment, he said.
Lenders are also
relaxing requirements in response to a drop in demand for mortgages. In
2013, a surge in borrowing costs undercut the refinancing boom. Interest
rates on 30-year fixed-rate mortgages rose from a record low of 3.31%
in November 2012 to 4.58% in late August, according to Freddie Mac
surveys. Rates fell last week to 4.33%.
Home prices that have
risen 28% since a 10-year low in 2012 have also stymied lending,
particularly to first-time buyers. Cash purchases mostly by investors
have filled the void, accounting for 33% of sales in March compared with
12% in mid-2009, according to the National Association of Realtors.
In
April, Mortgage Bankers Association Chief Economist Mike Fratantoni
lowered his forecast for home-purchase loans in 2014 to $626 billion.
That compares with $652 billion last year. He also reduced his forecast
for total originations this year by $100 billion to $1.07 trillion. In
2013, lenders originated $1.76 trillion in mortgage credit.
As
mortgage volumes decline, lenders are suffering losses. Only 58% of
independent mortgage banks and bank home-loan units were profitable in
the final quarter of 2013, according to a Mortgage Bankers Association
survey. JPMorgan Chase & Co., the second-biggest U.S. mortgage
lender, said in April that its origination business lost money last
quarter and would again do so in the second period.
To increase
lending, Wells Fargo has made it easier for borrowers who would have
limited equity to include gifts from relatives as part of a downpayment,
Codel said. In January, the bank began to accept borrowers with credit
scores of 600, down from 640, for FHA loans.
Wells Fargo also will
increase its loan-to-value ratios, permitting larger mortgages relative
to the worth of the property, in several states this month, Codel said,
declining to provide more details. Raising maximum LTVs lowers the
requirements for downpayments or minimum home equity that must be
maintained in refinances, measures meant to protect lenders or insurers
in the case of defaults.
Western Bancorp started offering
mortgages with "alternative income verification" at the beginning of the
year. So far, the loans are only available to borrowers putting down at
least 35%, though the lender hopes to lower that to 30% soon, CEO
Soukoulis said.
The lender, which sells the mortgages to community
banks, skips the examination of tax returns and pay stubs by using
software to vet the income of a self-employed applicant. The technology
turns information on their bank statements into data, and then analyzes
what it says about their cash flow. The process boils down to "rational"
old-school underwriting, Soukoulis said.
The TD Bank unit, which
mostly holds mortgages on its balance sheet, in April lowered the
downpayment requirement for some loans to 3% from 5%. These mortgages
don't force borrowers to take out private or FHA insurance, a typical
requirement for loans that account for more than 80% of a home's value.
The downpayment can be covered by gifts from family, a government
program or a nonprofit.
Peoples Privo Processing is looking to increase its share of the contract mortgage processing business as a direct result of these moves by large banks. www.peoplesprocessing.com
