Mortgage Credit Crisis or Potential Buyer Fears?

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Photo credit: Alan Cleaver

In late 2011 the Bipartisan Policy Center Housing Commission began examining why many creditworthy families were finding it so difficult to get a mortgage. During this time, interest rates were at historic lows, home prices had dropped significantly and the affordability of owning a home was reaching its peak. Even so, many lower and middle-income families found it impossible to get a mortgage.

Banks were still reeling from the collapse of the housing market, and understandably cautious about lending to those without perfect credit scores. Concerns about having to repurchase defaulted loans from GSEs (also known as “put back risk”), lack of regulatory “rules of the road” clarity and dysfunction in the appraisal process, all contributed to banks cutting back lending. Although many of these issues still plague the mortgage system today, credit access still remains unacceptably tight.

Although the final Qualified Mortgage rule release provided a little regulatory clarity, the rule’s requirement that the debt of QM borrowers may not exceed 43% of income, has raised concerns that many young borrowers saddled with student loan debt will not qualify for a mortgage and be shut out of homeownership. The question of rigid reliance on credit scores without meaningful borrower underwriting comes up. Is this method worth the reduced access to mortgage credit? Does this credit score reliance model make sense when “no doc” and “interest only ARMs” have been effectively banned from the marketplace?

New home sales are down, mortgage activity is down and HUD’s secretary, Shaun Donovan, recently told a group that tight credit and the lack of private capital is leaving “10-15%” of borrowers behind. New data suggests that the problem may be worse than tight credit, that it may be more mental. According to a national survey from loanDepot, the increasingly tight credit standards and fear of rejection are keeping 46% of potential homebuyers from even applying for a mortgage. The survey also shows that half of all Americans don’t know what the minimum required FICO score is to qualify for a loan. Based on the survey results, 30% of the population wants to buy a home in the next 2 years; of the 30%, 74% haven’t pursued a mortgage or started the process to see if they would qualify.

The loanDepot data shows that younger buyers are affected more than any other group by fears of not qualifying for a loan. This is a problem as 48% of all potential homebuyers who don’t own a home are in this younger demographic (ages 25-34) and many are potential first time homebuyers. The market share for first-time buyers have declined from 54% in March 2009 to 28% in February 2014.

How difficult is it to get a mortgage today and what FICO credit scores are being accepted at the moment?

A new national consumer survey conducted by survey research company OmniTel on behalf of loanDepot shows a widespread lack of specific knowledge and uncertainty about current market conditions for home buying qualifications. 56% of potential homebuyers are out of the market because they’re afraid of being rejected for a mortgage and 74% admitted to not even checking out the market or starting the process to get qualified. These are huge numbers of potential homebuyers that are “disqualifying themselves” before the home-buying process even starts.

The current numbers by popular loan origination and tracking software company Ellie Mae shows that:

  • 33% of new loans had borrower FICO credit scores below 700. A year ago the percentage was just 27%. This credit loosening reflects that lenders are financing far fewer loans this year, so they’re loosening up on FICO minimums for purchasers.
  • Debt ratios are more generous than many hesitant borrowers can imagine. In March 2014, Fannie Mae and Freddie Mac loans averaged 34% on the back end (total recurring debt to income), while FHA loans averaged 41%.
  • Down payments can be small. FHA’s average down payment for March 2014 was 5% and many borrowers put down just 3.5%. Down payment remains a significant barrier for many first time home buyers.
  • With all of the contradictory data and news stories about the housing industry, hesitant potential buyers should check out what’s really going on in the mortgage market as there may be more opportunities, even in this era of tighter underwriting, than they think.

    Housing Wire. “Where’s the key to unlocking the door to homeownership?” 30 April 2014.

    Los Angeles Times. “Mortgages may be easier to get than potential home buyers believe” 30 April 2014.,0,242681.story#axzz305vFEGdY

    Housing Wire.“The Credit Crisis Remains Real” 30 April 2014.


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