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Mortgage Lending Standards: It’s Not 2006 Anymore

dont go back

I’ve noted time and time again that it has become a lot more difficult to qualify for a mortgage over the past several years.

And the latest Senior Loan Officer Opinion Survey on Bank Lending Practices (wow that’s long) released today by the Federal Reserve illustrates my point.

Aside from the usual boring questions they ask, the Fed threw in a “special question” on residential real estate lending.

Do You Still Originate High-Risk Mortgages?

Specifically, they asked bankers how much more or less likely they would be to originate a GSE-eligible (backed by Fannie or Freddie) 30-year fixed mortgage loan intended for a home purchase today versus 2006.

They looked at six different scenarios:

– A borrower with a 620 Fico score and 10% down payment
– A borrower with a 680 Fico score and 10% down payment
– A borrower with a 720 Fico score and 10% down payment
– A borrower with a 620 Fico score and 20% down payment
– A borrower with a 680 Fico score and 20% down payment
– A borrower with a 720 Fico score and 20% down payment

So guess which combination bankers were the least likely to originate today.

Drum roll…clearly it was option #1 above.

Credit Score Still the Main Concern

If you’ve got a 620 Fico score, you’ve got bad credit. There’s really no way around it. It’s not awful credit, but it’s about 100 points shy of the American average, and not far from being abysmal.

Still, the FHA may still consider you for a mortgage if a subprime lender won’t.

[How to get a mortgage with a low credit score.]

And if you’re putting down less than 20%, you’ll need private mortgage insurance, which isn’t a slam-dunk these days with a crappy credit score.

In fact, many banks cited borrowers having higher costs and/or greater difficulty in obtaining mortgage insurance coverage as a top factor contributing to the reduced appetite for such loans.

But even with a 20% down payment, bankers still indicated that they were much less likely to extend home loans to borrowers with 620 Fico scores.

So it appears as if a prospective borrower’s Fico score is more important to bankers than their down payment.

[Credit score needed for a mortgage.]

By the way, the higher risk of putbacks of delinquent mortgages by the GSEs was listed as the most important factor in not wanting to originate such loans.

Another common issue was the less favorable or more uncertain outlook for home prices and the economy.

If a homeowner puts next to nothing down and their home’s value abruptly slips, they could fall into an underwater position. And that would increase the likelihood of default.

Additionally, bankers noted that the current spread of mortgage rates over the cost of funds has been insufficient to compensate for risk, which may explain why rates aren’t as low as they technically could be.

[Chase inflating mortgage rates.]

Funnily enough, the low mortgage rates don’t seem to be sufficient to compensate for the downside risk to home prices either, as evidenced by the lack of homebuyers…

HARP 2.0 Happening

Finally, roughly a third of bankers said they were actively soliciting HARP 2.0 applications, and were satisfying most demand for the negative equity loans.

Most expect about 60 percent or more of the loans to get approved and eventually fund.

However, half of the respondents said they had very little program participation.

And roadblocks are a plenty. There are putback risks, mortgage insurance transfer issues, and difficulty in identifying and subordinating existing second mortgages.

But it’s good to see that the program is actually off the ground and expected to help some people.

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