Mortgage Lenders Easing Standards, But Not for Everyone

With home prices rising in many markets around the country, might mortgage lenders start loosening up their hyper-strict underwriting rules and extend loans to buyers who now find themselves on the sidelines? Could current preferences for FICO credit scores in the mid-700s, down payments of 20%-plus and tight debt-to-income ratios begin to ease a little, given the widely acknowledged fact that loans underwritten in the last several years have performed exceptionally well — that is, defaulted at low rates?

Maybe. A lower unemployment rate would help, say mortgage industry leaders, as would signs of more robust growth in the overall economy. But the industry is unlikely to go back to what Frank Nothaft, chief economist of Freddie Mac, called "the loosey-goosey standards we had in 2005 through 2007": minimal documentation of income and assets, zero down payments and a disregard for applicants' ability to afford payments on the loans they sought.

Fannie Mae is planning an overhaul of its automated underwriting system in October. Fannie's system plays a huge role far beyond its own business, since lenders often submit borrowers' application data through it to get a quick read on whether a loan meets the baseline tests for eligibility — even if the mortgage is destined ultimately for the FHA, VA or a bank's portfolio. Although Fannie Mae officials insist that the upcoming changes to credit risk evaluation and other factors won't significantly alter the percentages of approvals that the system generates, they concede that some applicants who are currently getting green lights for loans won't get them, and others who are currently on the margins will sail through.

Other signs that the lending industry may not be quite ready to loosen up: In the latest quarterly survey of banks conducted by the comptroller of the currency, 25% said they had tightened rules for mortgages in recent months, whereas just 10% said they had eased their standards. Two-thirds said their rules remained the same.

Also, a study by mortgage data firm Ellie Mae of new loans closed in June found that credit scores for approved mortgages remain extraordinarily high. Fannie and Freddie's refinancings had an average FICO score of 767 and average equity percentages of 29%. Home purchase loans had average down payments of 21% and 763 FICOs. Even the conventional home purchase loan applications that lenders rejected had high credit scores and down payments by historical standards: 738 average FICOs and 19% down payments.