Yesterday, the Federal Deposit Insurance Corporation (FDIC) published a proposal for the long-awaited qualified residential mortgage (QRM) rule. It weighed in at 505 pages, with a substantial amount of footnotes. Buried on page 262 was a key finding that relates to consumer credit scores and mortgage loans. Apparently, very few mortgages are being given to people with credit scores below 620.
The QRM rule was jointly developed by six federal agencies including the FDIC, the Securities and Exchange Commission, and the Federal Housing Finance Agency. The Dodd-Frank Act requires the creation of this and other rules to shield consumers from mortgage-related abuses, and to reduce the chances of another financial crisis.
The QRM rule will require banks and lenders to retain at least 5% of the mortgage loans they originate, with one key exception. Loans that meet the definition of a qualified residential mortgage (QRM) are exempt from the risk-retention rules, which means lenders can sell them into the secondary mortgage market without limits.
Here’s where credit scores come into the picture. When creating the new rule, federal housing and financial agencies poured over a wealth of data relating to lending standards and loan performance. This produced a number of key findings, one of which has to do with borrower credit scores.
Very Few Mortgages for Borrowers With Credit Scores Below 620
In the QRM rule proposal, the agencies explain how mortgage-lending standards have gotten tighter since the housing market crashed — and how they remain tight even today.
This can be seen with credit scores and other qualifying criteria. During the housing boom, a credit score below 620 was not necessarily a deal breaker. Many lenders were approving borrowers with scores down into the 500 range. But not anymore.
According to the QRM rule proposal:
“Between 2007 and 2012, originations of prime purchase mortgages fell about 30 percent for borrowers with credit scores greater than 780, compared with a drop of about 90 percent for borrowers with credit scores between 620 and 680. Originations are virtually nonexistent for borrowers with credit scores below 620.”
The last sentence is revealing. According to their findings, very few mortgage loans were given to borrowers with credit scores under the 620 mark. So we can chalk it up as an industry standard.
This isn’t the first time we’ve seen the 620 credit score pop up in mortgage news. Earlier this year, we reported on a new rule created by the Department of Housing and Urban Development (HUD). It established tougher underwriting requirements for FHA borrowers with a higher amount of debt and a credit score below 620.
Lenders Less Willing to Work With Bad-Credit Borrowers
Mortgage lenders today are generally less likely to qualify borrowers with credit problems. We can see that by the credit-score trends mentioned earlier. This notion is further supported by the Senior Loan Officer Opinion Survey conducted by the Federal Reserve.
Regarding the loan officer survey, the QRM rule proposal stated the following:
“In the April 2012 Survey, a large share of lenders indicated that they were less likely than in 2006 to originate loans to borrowers with weaker credit profiles. In the April 2013 survey, lenders indicated that their appetite for making such loans had not changed materially over the previous year.”
The message to borrowers is clear. Before applying for a mortgage loan, borrowers should check their credit scores to see where they stand. If the score happens to be well below 620, some work needs to be done.
By raising their credit scores, borrowers can improve their chances of getting approved for a home loan, and may qualify for a lower interest rate as well. Those are some pretty strong incentives.