Lending standards still tighteningby Peter Miller
It has been clear in the last few years that lenders have gotten very picky when it comes to mortgage applications. Prior to the meltdown, information submitted on a supermarket bag and written in pencil probably would have worked for some lenders.
While such ideas may seem absurd, some lending practices were not far off. In his highly regarded book, “The Monster,” Michael W. Hudson showed exactly how some shady lenders operated. The goal of many predatory lenders was not to find highly qualified borrowers who could prove they could pay back their loan, it was to approve mortgage applications by the pound from individuals who were unlikely to understand that cheaper and better financing was available elsewhere.
Lender standards still tightening
Since the mortgage market crashed, lending conditions have progressively gotten more and more strict. A new report from Ellie Mae, a software company specializing in services for mortgage lenders, reports just that.
“In February, it appears that lenders continued to be very cautious in terms of credit quality, down payments and valuations,” said Jonathan Corr, chief operating officer of Ellie Mae. “The average credit score on closed loans was 750 last month, up from 740 six months ago; meanwhile, the average loan-to-value ratio was 76%, a decrease of 3% from August’s average.”
“Last month,” according to Carr, “if your FICO score was below 720 or you had a down payment or equity of less than 25%, there was a good chance that your refinance application for a conventional loan was denied or you were offered a significantly less attractive interest rate. The average DTI [debt-to-income] ratio for such a denial in February was 27/43.”
Tough lending standards are important
Many feel as though mortgage-lending conditions have gotten too strict—that legitimately qualified borrowers are being denied loans, a problem that if reversed could help the housing market heal faster. While there might be some truth to that statement, there are several reasons why current lending standards are fine as is:
- Most lenders–community banks, credit unions and responsible big banks such as BB&T and JPMorgan Chase–have always had tough lending standards and refused to make toxic loans.
- There should always be tough underwriting standards for mortgages; otherwise, you’ll quickly wind up with a pile of foreclosures and a failed financial system. That’s what happened several years ago and that was the result we got. The idea of looser standards, while attractive, is simply not a good idea–no matter what economic theorists might say.
- The Ellie Mae figures suggest that a very large number of people have maintained good credit during the past few years and can compete with current lending conditions.
Offsetting strict application standards has been the reality that with low mortgage rates individuals with a given income can qualify for more financing than would otherwise be possible if mortgage rates were higher. But the real trick to obtain a loan and low mortgage rates these days is not so much to maximize income as it is to maximize credit.