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Credit remains tight despite FICO plunge

Overall home-mortgage credit scores reached a new post-crisis low this spring, but that doesn’t mean that mortgages are easier to obtain for first-time home buyers.

According to a new report by the Washington, D.C.-based Urban Institute, lenders have been reaching down lower on the credit-score scale to refinance loans in the face of shrinking demand from borrowers. This has dragged down the median credit score for mortgages significantly.

creditscoresMeanwhile, credit scores for home-purchase loans have hardly budged at all, the policy center said.

The overall median FICO credit score fell to 725 in April, down 17 points from the level in June 2016. Between October 2016 through April, refinance credit scores fell 27 points, to 725. Purchase-loan credit scores fell just four points, to 725, over the same period, the Urban Institute said.

These numbers reflect the loans purchased by the government-sponsored enterprises Fannie Mae and Freddie Mac, or backed through the government loan programs.  

Karan Kaul, a research associate with the Urban Institute’s Housing Finance Policy Center, said rising interest rates have shrunk the pool of borrowers who can save money by refinancing. Lenders have responded by reaching down for lower credit scores among the pool of refinanceable borrowers.  

“[Lenders are] suddenly facing a market where [they] have loan officers showing up at work, and there is not enough demand,” Kaul said. “The natural reaction is to try to approve the more marginal borrowers. Now I have more incentive to bring that FICO score down a little bit, so I can approve more applications and keep my revenues up and keep my business going strong. That is what is happening in the refinance world.”

Kaul said that there isn’t evidence that credit has eased much for home purchases. The Urban Institute’s credit-available index remained unchanged in the first quarter, with credit roughly about half as available as it was between the 2001-2003 period.

According to the Mortgage Bankers Association's widely-quoted index, credit availability tightened marginally in May, but has tended to steadily loosen since hitting a low point in 2012. 

Recently, there have been signs that credit is easing for first-time buyers. Some national lenders have begun to offer grant programs that will cover most of the downpayment on loans. Fannie Mae also announced it was relaxing its debt-to-income (DTI) requirements.

Kaul said that the raw data suggest that lenders have remained ultra-cautious with borrowers, so as to avoid any defaults that might force them to buy back the loans or service them at a high cost.

“The low downpayment programs and the relaxation in the DTI, those are all very good moves,” Kaul said. “But, at the end of the day, relaxing the DTI or the presence of the low downpayment program is not going to make a lender who is worried about those mortgages defaulting tomorrow to want to make those mortgages. That is why it is so difficult for the industry to break the cycle of tight credit.”

Kaul noted, for example, that default rates on loans originated after the recession are running near zero.

“The default rate for mortgages today is not just below what it was during the housing bubble, but it is magnitudes lower than for mortgages that were originated in the late ‘90s and early 2000s, which was a period of reasonable lending standards,” Kaul said. “That screams to me that credit could be a lot more easier to obtain than is presently the case.” 


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