Rates Are Up, But It’s Easier to Get a Mortgage Now

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For the past few years, would-be homebuyers were faced with a frustrating paradox: Home prices had taken a beating and mortgage rates were at rock bottom, but without near-perfect credit and a hefty down payment, lenders wouldn’t go near your application.

What a difference a few years makes. Home prices are staging a modest recovery in most of the nation, with a few in-demand pockets bouncing back so fast people are using the phrase “seller’s market” again. They’re still cheap compared to the peak of the bubble, but steals of a lifetime are few and far between anymore. And after hitting a trough of just over 3.3% last fall, mortgage rates have gone on a tear, rising roughly an entire percentage point since spring.

This has slammed the brakes on the brisk trade banks had been doing in mortgage refinancing — the higher the rates go, the less attractive the prospect looks, given the investment of time and money required. According to the Mortgage Bankers Association, the number of refis just hit a four-year low.

To make up the shortfall, banks are trying to make new mortgage loans, but those are also on the wane, with sales of newly-built homes hitting a nine-month low in July.

(MORE: 5 Tips For Getting a Mortgage in Today’s Housing Market)

Banking consultant Ken Thomas says the industry is also bracing for the “perception of further rate increases” if the Federal Reserve scales back its bond-buying, which has kept rates low.

Reuters reports the sharp drop in refinancing is prompting Bank of America to cut “thousands” of workers. In February, JPMorgan Chase & Co. said it will cut up to 19,000 jobs in mortgage and community banking through the end of next year.

To counteract the drop in business, banks are looking customers who wouldn’t have gotten the time of day just a year or two ago. “This is all about maintaining market share in a shrinking market,” Thomas says. “When demand shrinks, the banks, to maintain market share, must increase the supply of credit by cutting rates — which they will not do in this increasing rate environment — or by reducing underwriting standards, which they are doing,” he says.
Megabanks like Chase and Wells Fargo are relaxing credit score and down payment requirements on some loans, according to BloombergBusinessweek. Banks are beginning to consider homebuyers with higher debt-to-income ratios and sales with higher loan-to-value ratios.
CEB TowerGroup senior research director Craig Focardi says banks do what’s called a “layered risk” analysis that takes into account all of these factors. Lenders haven’t been loosening them across the board, but they’re more likely to work with a borrower who’s risky in one area but otherwise looks good.
“For example, where many banks required documented ‘exceptions’ to increase LTVs from 80 to 85%, this is becoming more the norm,” Thomas says. And data from Ellie Mae shows that the average credit score of an applicant approved for a conventional loan is 759 — that’s high, but it’s actually still better than the previous year, when the average was 763 on approved applications.
While he calls it “a far cry from the banking cowboy days of 2003-2006,” when homebuyers could get a mortgage without putting a single penny down, Thomas says, “This signals the willingness of the Godzilla banks duking it out for market share to relax their standards to keep or increase market share.”
(MORE: Housing Report: Tight Inventory, Still-Rising Prices)
Banks relaxing lending standards: Last time we heard about this, it didn’t go so well. But industry analysts say it’s different this time — for now, at least.

“If lenders continue to weaken approval guidelines, credit score guidelines and debt-to-income requirements, then the industry could be looking at bigger credit problems down the road,” Focardi says.

But we’re not nearly there yet, he adds. Conversely, requirements that are a little less strict might help both banks and for borrowers.

“I do think the loosening is a good thing because underwirting has been tightening so much over the last five years,” he says. Compared to the anything-goes mentality that reigned in the run-up to the market crash, Focardi says the degree to which banks are relaxing their standards is still modest.

“If you make that comparison, there’s still room for mortage lenders to conintue loosening,” he says.

This is likely to be welcome news for would-be buyers who had been stuck on the sidelines. “For consumers, they might see rates going up but in some cases credit might be easier to get,” says Jed Kolko, chief economist at Trulia.com.

“When rates go up, that hurts housing demand, but if they’re easier to get, that could help,” he says. “The hope is it will help offset the impact of rising rates.”

2 comments
Kred.pl
Kred.pl

I observe mortgage market in the US since I believe that it precedes the changes in mortgage and of course real estate market in Europe. 

What I can say, is that in Europe we observe quite different situation, where mortgage rates are still low, but it's difficult to obtain a mortgage. The same thing can be seen in Poland, where the mortgage rates are hostorically lowest, but surprisingly it is much more difficult to obtain a mortgage that in 2007-2008.

I wonder if in next 12-18 months we will seen  the same situation in Europe as presently observed in the U.S.

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