Mortgage Approvals Fell before Watt’s Initiatives

Approvals of applications to refinance hit seven month lows and closing rates for all mortgages took a 3 percent dip in September, just three weeks before FHFA Director promised lenders he would to take steps to loosen standards. The September 2014 report also found the closing rate on mortgage refinancings fell nearly 6 percent to 48.3 percent in September, the lowest since February.

Purchase loan approvals also fell, from 65.1 percent to 64.3 percent, but still above the 60.1 percent annualized closing rate in 2013, according to Ellie Mae’s Origination Insight Report.

In a speech October 21, Watt said FHFA will release guidelines “in the coming weeks” to allow increased lending to borrowers with down payments as low as 3 percent. FHFA, which regulates Fannie Mae and Freddie Mac, also will help lenders who sell loans to the mortgage giants by easing standards on borrowers who don’t have perfect credit profiles. The move is expected to help open up the credit box to first-time buyers, self-employed borrowers, borrowers who have had recent job switches, and borrowers who faced financial hardship during the recession.

Watt also said that Fannie and Freddie would not force repurchases from lenders of mortgages that are later found to have minor flaws in them, as long as borrowers have kept up with their mortgage payments for 36 months and lenders wouldn’t be forced to buy back bad loans if flaws were later discovered in the reporting of borrowers’ finances, debt loads, and down payments — as long as the borrowers would have qualified for the loans had the information been accurate.

The September Ellie Mae data suggests that the job to improve approval rates is bigger than it seemed two weeks ago and momentum is headed in the wrong direction. Driving the decline was a plunge in refi closing rates of nearly 6 percent points even as the refinancing market share improved in September from 33 percent to 36 percent.

Not only are fewer loans being approved, it is taking longer to process them.  The average time it takes to close a loan increased in September, from 39 to 41 days, climbing above 40 days in September for the first time since June; not since January has it been higher.  The average number of days to close purchase loans rose 3 days from August to September

“While rates continue to fall, loans have been taking slightly longer to close since the peak of the summer buying season,” Jonathan Corr, president and COO of Ellie Mae. “It will be interesting to see whether these trends continue as we head into the winter, a traditionally slower time for housing sales.”

The Origination Insight Report mines its application data from a robust sampling of approximately 57 percent of all mortgage applications that were initiated on the Encompass® origination platform. The Origination Insight Report is considered a strong proxy of the underwriting standards that are being employed by lenders across the country.

In 2013, approximately 3.5 million loan applications ran through Ellie Mae’s Encompass mortgage management solution. The Origination Insight Report mines its application data from a robust sampling of approximately 57 percent of all mortgage applications that were initiated on the Encompass origination platform. Given the size of this sample and Ellie Mae’s market share, Ellie Mae believes the Origination Insight Report is a strong proxy of the underwriting standards that are being employed by lenders across the country.

The Origination Insight Report focuses on loans that closed or were denied in a specific month and compares their characteristics to similar loans that closed or were denied three and six months earlier. The closing rate is calculated on a 90-day cycle rather than on a monthly basis because most loan applications typically take one and a half to two months from application to closing. Loans that do not close could still be active applications or applications withdrawn by consumers or denied for incompleteness or nonqualification.