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Beware the Big Lie About Lending Standards

Beware the Big Lie About Lending Standards

Have you heard the three biggest lies?

  1. The check is in the mail.
  2. I’m from the government and I’m here to help you.
  3. It’s easier for young buyers to get a mortgage today because lending standards are looser than they were a few years ago.

Here’s the truth.  Despite everything you may have heard or read, the median profiles for approved PURCHASE loans have barely budged since 2012.  The news reports, studies and self-aggrandizing news releases from lenders mix refi loans—which have indeed improved greatly over the past four years—with purchase loans to give the impression that it’s significantly easier to get a loan to buy a home today.

Buyers below the age of 35 are the biggest victims.  Last year 5 percent of young buyers who applied for a mortgage were rejected, compare to 4 percent for all age groups.[1] But that doesn’t reflect the reality that hundreds of thousands aren’t even trying.

Perception vs. Reality

In fact, there’s good reason to believe many younger adults could qualify for a mortgage if they chose to. A recent TransUnion study, for example, found that consumers ages 18-29 with a student loan in repayment generally are able access new loans and mortgages as well as young adults without student loans.[2] A 2014 survey by a top real estate research firm. Another study, by the respected research firm, Zelman & Associates, found that only of 25-29 year olds and 40 percent of 30-34 year olds said they believe they could qualify for a mortgage.  “That would mean 60 to 72 percent of the traditional “first-time” homebuyer demographic may be underestimating their potential for getting a conforming, conventional mortgage with a low down payment,” Zelman said. [3]

That misperceptions are keeping millions of Millennials locked in apartments no doubt is true, but the counter claim that standards are getting better for them is not.  Even four years ago 2012 survey of senior bank officers by the Federal Reserve[4] suggested the biggest banks were finally going to loosen things up.  Surveys like these, as well as sloppy media coverage, have created the impression that the problem is well on its way to being solved for young buyers.

The Numbers Don’t Lie

Not true.  An analysis of hard data from loan approvals over the past four years reveals the big lie.  Standards have indeed loosened for refis but barely at all for purchase loans, which are certainly of greater importance to young buyers and the real estate economy as a whole.

Ellie Mae[5], the industry-leading provider of loan origination software, processes more than 2 million mortgages a year. From that database, it makes public hard data illustrating origination trends, including the actual median values of approved loans on a monthly basis.  This data is no survey; it’s a measure of what is really going on in the mortgage marketplace.  So, are lending standards REALLY getting better? Here’s the answer.

Median Approved Mortgage Profiles, 2013-2016

Loan Type

January 2016

January 2013

Percentage Change

All Loans

   FICO Score












Conventional Refi Loans

   FICO Score












FHA Refi Loans

   FICO Score












Conventional Purchase Loans

   FICO Score












FHA Purchase Loans

   FICO Score












Definitions:  Loan-to-value is the ratio of the appraised value by the home divided by amount to be borrowed.  The first figure for dent-to-income are the total monthly gross income divided by monthly debt payments, except for housing.  The second figure is the total monthly gross income divided my month housing payments.

The numbers speak for themselves.  For young buyers trying to qualify for a mortgage, their chances of success are negligibly better today than they were three years ago, with the possible exception of debt; the median debt load is 8 to 9 percent higher than three years ago.  FICOS and LTVs have barely budged.

For owners trying to refi, the picture is very different. Conventional FICO and loan-to-value standards are 5 percent lower.  FHA FICOS over 10 percent lower.  DTIs have increased from 13% to 24%.

Why are the differences between refi and purchase loan types so great?  There’s a one-word answer: risk.  Refis go to established homeowners with a record of making mortgage payments.  Over the past seven years their equity has increased and will likely continue to do so now that the recovery is underway.  Purchase borrowers, on the other hand, probably have had no equity or negative equity in the home that they are buying.

The number also demonstrate why FHA is a good idea for buyers with a marginal credit and debt history.  Lower standards are made possible because the 90 percent government guarantee reduces risk to lenders and FHA’s mandatory mortgage insurance protects taxpayers.

Looking Ahead

Does the snail’s pace of progress in lending standards mean that we are close to reaching a point of equilibrium between the disastrous policies that created the subprime crisis and the super strict reaction after the housing crash in 2007?  Or is there more relief ahead, at least enough to make a real difference to young buyers?

Most experts would vote for a little more loosening, especially if they realized how little real progress has been made to date.






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