Mortgage Lenders Lower Standards, Carry More Risk to Maintain Loan Volume

Lately, I’ve been reporting on various signs that mortgage standards are easing across the board. It seems lenders are willing to carry more risk these days, in order to attract more borrowers at a time of declining mortgage activity. For more “evidence” of this trend, we can turn to the latest Origination Insight Report from lending-software company Ellie Mae.

According to Jonathon Corr, president and chief operating officer of Ellie Mae, the company’s latest Origination Insight Report shows continued easing across the lending industry. In a press release published earlier today, Corr said the following:

“In August 2013, the average FICO score for closed loans dropped to 734, the lowest level since we began our tracking in August 2011. Meanwhile, loan-to-value and debt-to-income ratios rose slightly again last month — continuing the credit-easing trend.”

The monthly report pulls data from more than 20% of all mortgage loan origination occurring across the United States. So it’s a fairly good indicator of national trends and standards. And lately, those trends can be summed up with a single word. Easing.

It seems that mortgage standards are beginning to ease, after a years-long era of strictness brought on by the housing crisis.

Mortgage Standards Eased Again in August: FICO, DTI and LTV

Here are some interesting tidbits from Ellie Mae’s latest origination report, which contained data through the end of August 2013:

  • In August, mortgage loans that actually closed had an average FICO credit score of 734. That was three points lower than July’s average of 737, and eight points lower than June. It was also the lowest average FICO score since Ellie Mae began tracking them in August 2011.
  • The average loan-to-value (LTV) ratio rose to 82% in August, up one percentage point from July and three percentage points from the start of the year. This suggests that lenders are allowing for smaller down payments.
  • Debt-to-income (DTI) ratios also rose slightly in the latest report, landing at 24/37. The average front-end DTI rose to 24% in August, up from 23% last year. The average back-end DTI rose to 37%, three percentage points (3%) higher than at the start of the year. This suggests that lenders are allowing borrowers to have slightly more debt, when taking on a home loan.

Don’t get too wrapped up in the exact numbers here. These are merely averages taken from thousands of individual loans. It’s the overriding trend that’s worth noting. And the trend shows that mortgage standards are easing across the board. This is not surprising given the drop in application volume seen in recent weeks.

Rising Mortgage Rates Push Volume Down

The big story here is that mortgage volume is dropping in response to rising interest rates, and lenders are easing their standards to maintain volume.

The average rate for a 30-year fixed mortgage has risen by 123 basis points (1.23%) since January 2013. Refinancing activity has fallen off a cliff since then, to the point that Citigroup, Inc. had to close one of its refinance centers in Illinois.

Home buyers are also feeling the squeeze, as a combination of rising rates and home prices reduces their buying power.

All of this reduces volume (read “profits”) for mortgage lenders across the country. Home loan application volume hit a five-year low earlier this month, according to the Mortgage Bankers Association (MBA). Lenders that want to maintain volume must ease their standards to qualify more borrowers. That’s what we are seeing across the industry right now.

Consider the additional evidence in these recent stories:

Amerisave drops overlays to bring in more borrowers
Amerisave, which calls itself one of the largest retail mortgage lenders in the U.S., recently told HousingWire it is removing some of its overlays to align its mortgage standards more closely with Fannie Mae. This would make it easier for borrowers to qualify for a loan.

JPMorgan Chase reduces down-payment requirements
The second-largest mortgage lender in the country recently said it will ease down-payment standards for borrowers in states hit hardest by the housing crisis, such as Florida. The company plans to drop down-payment requirements from 10% to 5% in select areas.

New lending rules could eventually counteract this industry-wide easing of standards. The qualified mortgage (QM) rule, and the closely aligned qualified residential mortgage (QRM) rule, both take effect in 2014. These rules will require stricter underwriting and prohibit certain high-risk features, such as balloon payments and negative amortization.