This was supposed to be the year that getting a mortgage would become easier. Now that we’re halfway through, we’ve seen home sales and closings substantially improve over last year, including by first-time buyers. This must mean that access to credit is getting better, right? Well, it doesn’t look that way.
After mortgage backers Fannie Mae and Freddie Mac clarified their credit qualification standards last fall to encourage lenders to ease their requirements, it seems like credit access would improve. And then the Federal Housing Administration lowered its insurance premiums, and Fannie and Freddie introduced new low-down-payment programs for qualified buyers.
Looking at the year’s data through June, closings of existing homes are up 8% over last year. And a greater proportion of those buyers had taken out a loan: The share of closings that were all-cash transactions in June was 22%, down from 32% last June.
Meanwhile the share of closings represented by first-time buyers, who are most dependent on credit access, has improved modestly from 28% to 30% this June, and mortgage purchase applications are up approximately 19% over last year.
This sounds good, but when we look at data specific to mortgages, they’re inconclusive. The Mortgage Bankers Association’s Credit Availability Index was at 122 in June, up 5% from June 2014. Before you think that a 5% improvement over last year is an impressive expansion of credit, consider the fact that the index peaked at 869 in June 2004. While no one would suggest that an index of 800 was, in any way, a risk-appropriate level of credit availability, 122 is clearly far from normal.
Looking for evidence
I took a spin through useful stats on approved and denied mortgages from mortgage software company Ellie Mae to see if I could find any evidence of looser credit standards or even any insights to help today’s buyer who may be struggling with getting approved for a mortgage. I did not find evidence of easier credit access.
The average FICO score on a closed purchase mortgage in June was 727. That average has remained between 724 and 742 for the past 24 months. In the past year, it’s been stuck between 726 and 732. Across mortgage loan types, credit scores haven’t moved much in the past year—they remain solidly of high quality and represent above-median credit-quality households.
Meanwhile the average denied FICO score has moved a bit. In June it was 672, down from 686 last June. What does that mean? More lower credit-quality households are applying but not getting approved. Yet at the same time, the percentage of purchase applications making it to closing has risen from 64% last June to 69% this June.
Times are still tough for those with tarnished credit
This would suggest that at least from a credit score perspective, it’s predominantly consumers with high scores who are applying. Researchers from the Urban Institute reported this spring that borrowers with anything less than pristine credit were having a hard time getting a mortgage. It would seem that their observations are still correct.
Borrowers will find more flexibility on FHA mortgages, where the average FICO score on closed mortgages in June was 689. However, that score was up slightly from the average score of 683 last June.
The data from Ellie Mae also show that loan-to-value ratios, measuring the loan amount relative to the home purchase price, are unchanged on average, despite more options available this year for low down payment loans, which would result in a higher LTV. The average LTV on FHA mortgages closed in June, for example, was unchanged from last year at 95% (representing a loan with 5% down).
There is still hope for borrowers who do not quite fit this credit quality mold. The July Senior Loan Officer survey data from the Federal Reserve indicated that banks have slightly eased lending standards for a number of categories of mortgage loans over the past three months. As a result, we should start to see that affecting the closing averages in the months ahead.
The one mortgage type for which the most banks have reported an easing of standards is the jumbo (both the conforming and nonconforming). So if you are a higher-income buyer looking for a mortgage to buy a home priced above the conventional loan limits, you will likely have more flexibility.
The strong demand we’ve been seeing all year leading to substantial increases in home sales represents no deterioration in loan metrics. The improving job market and efforts by households to save and improve their credit scores are enabling them to get approved for mortgages.
This is all good, right? Not exactly.
Today’s limited credit availability is at least partly to blame for the tight supply that’s leading to higher prices and higher rents. Builders are not convinced that there’s enough depth of demand to absorb higher levels of new construction, so they are holding back and focusing on their profitable growth instead. Meanwhile, a substantial percentage of today’s homeowners with mortgages underwritten years ago fear not being able to qualify for a new mortgage today, so they stay on the sidelines and keep their homes off the market.
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