Easier Mortgages: Amerisave and Other Lenders Drop Overlays, Relax Standards

Amerisave, a U.S. mortgage company that calls itself “one of the largest retail mortgage lenders in the country,” recently made it easier for borrowers to qualify for a home loan. According to a story published yesterday on HousingWire, Amerisave is removing some of its overlays in order to align its standards with those issued by industry juggernaut Fannie Mae.

This would essentially mean that borrowers could qualify for a mortgage through Amerisave, as long as they meet the minimum standards promulgated by Fannie Mae. Of course, I don’t work for Amerisave, so I’ll defer to them on their exact qualification criteria.

Here’s what Craig Dodd, a senior vice president at Amerisave, told HousingWire recently:

“We are responding to the needs our clients have expressed by removing some of our more restrictive overlays that we applied to Fannie Mae guidelines in the past.”

Overlays: Standards On Top of Standards

An overlay, in mortgage lingo, is a higher standard on top of a lower one. Fannie Mae, Freddie Mac and FHA maintain minimum standards for the loans they will buy or insure. But lenders often impose their own standards for borrowers, and these can be stiffer than those issued by the two GSEs or FHA.

Credit scores are a classic example of an overlay. FHA requires a minimum score of 500 for program eligibility, and a score of 580 for maximum (96.5%) financing. But most mortgage lenders who originate FHA loans require higher scores, generally above 600. This is an overlay — a stricter requirement on top of a broader one.

Amerisave did not say exactly which overlays they are removing, but credit scores and debt ratios are likely among them.

Getting Easier to Get a Mortgage

Call it a trend. Amerisave is the latest mortgage company to announce it is easing standards for borrowers by removing overlays.

We have seen other signs of easing in the mortgage industry lately. Just yesterday, I reported that the Department of Housing and Urban Development (HUD) shortened the waiting period for FHA borrowers who’ve been through a foreclosure, bankruptcy or short sale. The previous rule required such borrowers to wait at least three years, in most cases. The revised rule will shorten that period to 12 months, for borrowers who can show that it was an isolated event.

We’ve also had reports of lenders offering reduced down payments in states hit hard by the housing crisis, such as Florida.

Lenders aren’t the only ones widening the net. MGIC Investment Corp., one of the largest private mortgage insurance (PMI) companies in the U.S., recently announced it would insure loans with a loan-to-value (LTV) ratio up to 97%. This means borrowers could make a down payment as low as 3% and still qualify for PMI backing. This is good news for borrowers, since lenders require PMI on mortgages with an LTV ratio below 80%.

New Rules Prevent a Return to Reckless Lending

Some industry watchers fear that the current easing within the mortgage industry is a step toward reckless lending, like what we saw during the housing boom. Those where the days when nearly anyone could qualify for a home loan. But there’s a big difference between the current mortgage market and the market of the 1990s and early 2000s — namely, Dodd-Frank.

The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated a variety of new rules for the mortgage industry. The qualified mortgage (QM), qualified residential mortgage (QRM), and ability-to-repay rules prohibit a range of loan features that were deemed high-risk. For instance, negative amortization, balloon payments, and interest-only loans are verboten under the new rules.

So while it may be getting easier for borrowers to get a mortgage loan, it won’t be as easy as it was during the boom. And that’s a good thing.