Purchase Mortgage Approvals Plummeted Suddenly in June

The approval rate for mortgages to buy homes dropped from 63.6 to 50.3 percent in June, the lowest approval rate for homebuyers’ applications in more than three years since Ellie Mae initiated its Origination Insight Report.

The dramatic drop in mortgage approvals coincides with the continued difficulties buyer have having, widely cited as a cause for slowing sales and moderating prices.  The National Association of Realtors reported in July that even borrowers with “strong ” credit scores are having difficulty getting financing. About 59 percent of survey respondents who provided credit score information reported FICO credit scores of 740 and above. In the 2001-04 time frame approximately, 40 percent of residential loans acquired by the Government Enterprises (Fannie Mae and Freddie Mac) went to applicants with credit scores above 740. Only about 2 percent of REALTORS reported a purchase by a buyer with credit score of less than 620.  Ellie Mae reported that in June, 32% of closed loans had an average FICO score of under 700 compared to 25% in July 2013. About 14 percent of Realtors reported having clients who could not obtain financing.

Many lenders are approving fewer applications because of the strict underwriting requirements of the QM Rule.  Last quarter, the Federal Reserve found that banks are granting fewer loans because of the new rule that regulates ability to repay requirements even for loans to borrowers with FICO scores higher than 680.

While few banks changed their standards because of the new rule, many said they are approving fewer mortgage applications, especially smaller banks. Under the Consumer Finance Protection Board’s rules which went into effect in January, loans must meet certain underwriting criteria to be considered qualified mortgages. But the agency created an exception for all loans purchased by Fannie Mae and Freddie Mac, allowing them to automatically qualify for QM status. Banks are generally seeking to make QM loans because they receive greater legal protections.

(See One Third of Banks Approve Fewer Prime Mortgages Due to QM Rule)

Ellie Mae’s Origination Insight Report analyzes mortgage files processed with its loan origination system, showed loans that closed during the month of July took an average of 37 days to go from application to funding. That’s the shortest closing time since Ellie Mae began tracking the metric in August 2011.

The purchase market accounted for 67% of the closed loans, which is the highest percentage in nearly three years. The average 30-year note rate for all loans declined to its lowest level this year, to 4.39%, a 4-basis point drop from June.

The Origination Insight Report retrieves application data from approximately 57% of all mortgage applications initiated on Ellie Mae’s Encompass platform.