I read an article recently that argued it’s hard to get a mortgage these days. Just seeing the headline got me a little fired up.
When it comes down to it, it’s not difficult to get a mortgage today, though people may think it is thanks to news like this.
The post highlights the fact that recent mortgage default rates are nearly non-existent. But cherrypicking recent data probably doesn’t give us a clear picture of what may happen in the future even if we maintain current mortgage underwriting standards.
Apparently less than 1% of mortgages doled out since 2011 have defaulted. It just so happens that since that time home prices have nearly doubled in some areas, and have generally risen by half in many regions throughout the country.
At the same time, mortgage rates have hovered and flirted with record lows, meaning these borrowers have super low monthly mortgage payments and boatloads of home equity.
Why then would they default? It would be unimaginable unless something completely unexpected happened, or a major hardship took place.
Maybe They Don’t Realize What’s Out There
The article also points out that nearly 70% of those with Fannie and Freddie mortgages originated since 2011 had FICO scores of 750 or higher.
While that might tell us it’s time to open the credit box, it could also tell us that borrowers with lower credit scores are simply uninformed about what’s out there.
Indeed, there are scores of loan programs and lenders willing to offer mortgages to borrowers with much lower credit scores.
Sure, it might be harder to land financing if your credit score is truly subprime (below 620), but there are plenty of options for those with marginal credit scores.
In fact, the 97% LTV mortgage programs offered by Fannie and Freddie only require a 620 FICO score. With that poor score, borrowers can get a home with just 3% down payment.
So to get this straight, basically no skin in the game and a poor credit score and you’re still approved for a mortgage.
And at a time when mortgage rates are near the lowest on record. Heck, if you still can’t qualify then it might not be prudent to further expand the credit box.
It might just be that would-be borrowers with lower credit scores are fearful of what the housing market might bring after the most recent crisis and are simply staying on the fence. Or are lacking the confidence to take the plunge.
Then there is the group that was foreclosed on or sold short, who are still unable to obtain financing until they become qualified boomerang buyers. Should we cut waiting periods so they can return earlier?
Lack of Homes, Not Credit Availability
Perhaps the data that says credit availability is low compared to pre-crisis levels is getting thrown off by today’s very peculiar housing market.
Could it just be that it’s difficult to find a home and not a mortgage? That if a potential buyer were able to successfully bid on a home they’d be able to land the necessary financing?
I wonder sometimes if that’s skewing the data. I’ve said in the past that you may need a higher down payment than is necessary simply to outbid rival home buyers.
The same might be true of FICO scores. Perhaps your offer won’t look as good if you’ve got OK credit compared to another buyer with a 720+ score.
So it could simply be competition in the housing market that is making it look as if lower-quality borrowers are being squeezed by lenders, when it fact they too could and would be approved for a mortgage if given the chance.
I really don’t know what lenders could possibly do to open things up further. And my fear is that making it any easier might burn these very loan recipients in the future.
Bubbles are financially driven and if mortgage financing goes down the wrong path again, those who are able to finally buy (supposedly) thanks to looser underwriting guidelines may be the first ones to lose.