As 30-year rates hit historic lows, some borrowers are hoping that lenders will be loosening their underwriting standards and that it will be easier to qualify for a mortgage.
They’re hoping in vain: industry data shows that controls have gotten even tighter.
Average credit scores on new loans closed in August 2012 were 750, nine points higher than a year prior. Fannie and Freddie borrowers’ scores averaged 763 for that same period, and considering that fewer than 22% of Americans have credit scores over 749, there are a lot of people out there who are highly unlikely to qualify for a loan.
Lenders also appear to be requiring larger down payments, with the average Fannie and Freddie borrower putting down 21% (to put that in context, the median down payment in 2005 was 2%.)
Originators hope that eventually lenders probably will relax about upcoming regulation, be less fearful about costly buyback demands from the GSEs, and strip away some of their extra credit-risk fees. The key word here, though, is “eventually.”
I continue to hear that the underwriting pendulum has swung too far, excluding common sense borrowers, self-employed borrowers, and loans being held up for requests on explanations for a $100 deposit four months ago. And borrowers are in a tough spot. An individual living on a fixed income over the last 20 years (i.e., from the end of 1991 to the end of 2011) would have suffered a 39% loss of purchasing power over the 2 decades using the CPI as a gauge of his/her inflation.
Now often times loan officers become involved in their client’s finances. This happens much more frequently now, versus ten years ago, as LO’s tend to work with clients on improving their financial condition.
I received this note from a broker in Tennessee:
“A question that sometimes comes up during the home buying process is if the borrower should use their mortgage payment for the 401(k) catch-up contribution or just stay the course. The payoff can save money on the interest rate, but by paying for the home mortgage and tax you’re trading off a reduced retirement account for lower future loan expenses. To determine whether this makes sense, consider several factors. Namely, the cost of withdrawing from your retirement account, as your withdrawal will be taxed as ordinary income at the federal, state and local rates. Even with an estimated tax rate, borrowers with higher incomes and local taxes could owe 40% or more on a retirement distribution and anyone under 59½ must add a 10% penalty to that tax bill. Also, will you be able to rebuild your retirement portfolio? Repaying such a large sum may not be possible, especially if the 401(k) is your only pool of funds for retirement, and the savings on mortgage payments rarely will make this work. If you think you might spend all or some of the mortgage money, it is better to pass on paying it off. Lastly, do you have more costly debt you should pay off first, like high interest credit card payments? Borrowers should know that agents can help them with managing expectations, which is essential to having a smooth home buying experience, and asking, ‘What happens next?’ and, ‘What’s the margin of error on this cost estimate?’ Also, borrower should ask, ‘What do you see that I don’t?'”
But speaking of tough guidelines, a while back I received this note from an LO:
“I like the idea of a top ten list for strict underwriting. I have a couple contributions. I had a hospital administrator recruited by Phoenix Children’s Hospital. He moved from Kentucky and put his house in Kentucky up for sale. He got in a 3-month short term rental here in Phoenix while he moved his family out here and sold the Kentucky home. Without the sale of the home he had 20% to put down on his Jumbo Loan home here in Phoenix. Everything about the borrower was perfect; extremely high FICO, good investment and retirement fund reserves, a long and steady employment history, 20% liquid funds sourced and seasoned for years, extremely low DTIs etc. A week and a half from close I get the notice from the wholesaler that his loan had been denied. I check the denial when it comes. The reason he was denied was that he paid for the 3-month short term rental up front, which was reimbursed to him by PCH. Still confused? So was I. The reason for the denial was the fact that he was unable to document on time MONTHLY payments for his rental. It took 5 days and 3 layers of management to help them understand how absurd that was. It was finally approved and funded.
The second is where another perfect borrower doing a 20% down conventional loan had recently travelled to Las Vegas and won a little bit of money. He deposited $780 cash into his bank account that had a balance of over $40,000. The investor denied the loan because he could not document the actual money. We showed airline tickets, hotel receipts and the deposit slip. No go. We had to switch investors to get it done.”
And Joe B. writes:
“I was talking to a close friend yesterday, a 30 year veteran of the industry, having held several significant executive positions. He’s now with a third-party company. I know this guy: he’s very conservative, never any flashy spending, etc. He’s now in the 61st day of a very simple refinance. He had to have his wife sign a statement indicating that he had access to their JOINT checking account. When he questioned the underwriter about the absurdity of this, she didn’t have an idea of what a joint account was. All she said was ‘our investor requires this.’ The biggest issue is that we have dramatically gone from one extreme to the other. Until recently, most underwriting was automatic engine based. Now we are having ‘real’ human underwriting. Unfortunately we haven’t spent years training underwriters to actually underwrite. Now that they are being tasked to do this, many of these hard-working, well-intentioned individuals have no idea what passes as true underwriting.”
Phil G. wrote:
“Regarding appraisals, the value expected from the appraiser seems more tied to the LO’s ability to predict it through research, or should I say the LO’s inability. That is, some LOs consistently predict the value within $10k while most haven’t a clue how to research it or they are so lazy they rely on the home-owners idea of what the value should be (which is always distorted). It’s almost like they think that if they write in the submission application then it will all work out somehow. Since the loan is submitted to the lender before the appraisal is completed, the lender ends up with a completely distorted loan profile when the real value comes in. Sure, appraisers screw up from time to time, but I have found in these situations the expected value put on the submission application is usually more hopeful than factual. My big issue with the process is the unwillingness of many lenders to accept ported appraisals. So, you have a borrower that pays $400 for an appraisal but then the loan is denied for an unrelated reason at the lender – so, the LO finds another lender. But the new lender will not accept the recently completed appraisal and forces the home owner to purchase a new one. Why? How does not accepting an appraisal from a national AMC protect the borrower, or the lender? Why must the borrower pay again? Ridiculous.”