22 Apr, 2014

Is It Getting Easier to Get a Mortgage?

mortgage loan

If you’ve tried to get a mortgage in the last few years, you probably have a story to tell about how much more difficult the process has become.

Maybe the bank asked you to explain every large deposit into your bank account so that they could ensure that your down payment funds were actually yours. Or they parsed your tax returns far more carefully than in the past to make sure you actually earned what you said you earned when you applied for the loan.

There’s a reason for this. The housing bust, which was preceded by an unusually careless lending environment, led everyone involved in the lending process—from mortgage banks to insurers to secondary-market players like Fannie Mae and Freddie Mac to government regulators—to become far more cautious.

But as this article in the WSJ last weekend observed, there are signs that lenders have stopped tightening up and may actually be loosening up a little bit. Average credit scores have declined a little bit over the last year, and the share of loans with low-down-payments outside of government-insured lending programs is rising.

This means there are more options for borrowers without a 10% down payment. It also means that borrowers without perfect credit might have an easier time getting a loan. And borrowers seeking a jumbo mortgage, which is too large for government backing and in recent years had required 20% or 25% down payments, can now find more options with 15% of even 10% down payments.

Of course, a few things aren’t likely to change any time soon. For one, lenders are still exacting when it comes to documenting incomes. Banks got into big trouble with so-called “liar’s loans”—that is, mortgages where they didn’t verify a borrower’s income and their ability to repay the loan. Lenders have had to buy back billions of mortgages from investors, including Fannie and Freddie, that were found to mislead investors about their quality. And banks face new consumer-protection regulations that impose new potential legal liability if they don’t ensure that a borrower has the ability to repay a loan.

Banks are also likely to be slow in offering new products. Such innovation during the credit bubble often proved harmful to consumers and investors alike. Borrowers took out adjustable-rate mortgages with low teaser rates, or with terms that allowed them to make minimal payments at first but that carried sharp increases later, that led to problems once home prices began to fall.

To the extent that it does get easier to get a loan, three forces are likely at play:

First, home prices have stabilized. This gives confidence not only to lenders, but importantly, to mortgage insurance companies, which typically cover initial losses on low-down-payment mortgages.

Second, mortgage volumes have plunged sharply after rates rose last summer, killing the latest in a series of refinancing waves. Banks are on the hunt for new business, and loans that they considered too time-consuming or complex a year ago might be more easily entertained now that there isn’t a line of customers out the door looking to refinance.

Third, the government has gradually raised the fees that are charged for certain loans insured by the Federal Housing Administration, as I wrote about at the WSJ’s Real Time Economics blog. These loans became a mainstay of the housing market during the downturn because they were one of the only remaining sources of low-down-payment mortgages. The FHA requires borrowers to put down just a 3.5% down payment.

As the FHA has raised its insurance premiums for those loans, private insurers have become more competitive, particularly for borrowers with good credit. This doesn’t mean that it’s getting easier to get a mortgage, but it does mean that more borrowers will have more options.

Of course, any time there’s a mention of easier lending standards, there’s always murmurs of worry that banks are simply repeating the mistakes of the bubble days. In other words, how concerned should we be of a return to the lax lending practices of 2004-06?

That will be worth watching at some point down the road, but for right now, there’s little to suggest that the products or practices that caused the housing bubble are coming back in even a small way. Yes, low down payment mortgage are riskier than those with large down payments, but low down payments by themselves didn’t cause the housing bubble. Lending to borrowers with damaged credit is still largely not happening. And so-called “stated income” loans that don’t require borrowers to verify their incomes are nowhere to be found.

Even if lenders are easing up a bit, economists appear to be more concerned for now that lending standards are too strict—not too liberal.

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