STRATMOR: To Expand Borrower Pool, Lenders Loosening Credit Requirements

STRATMOR Group, Greenwood Village, Colo., said lenders and investors are increasingly offering credit score, eligibility changes and programs to expand the mortgage market.

In its monthly Insights report, STRATMOR Senior Advisor Rob Chrisman said higher loan-to-value and lower credit score product options, together with coming changes to credit bureau reporting methods hold potential to unleash first-time homebuyer demand. Limited housing inventories, however, could offset these potential increases in originations that would otherwise result from looser credit and eligibility standards.

“After perhaps overcorrecting in the wake of the 2008 financial crisis, underwriting standards are beginning to loosen once again in an attempt to broaden the reach of the mortgage market to more borrowers,” Chrisman said.

The report noted after the financial crisis in 2008, borrowers’ average credit scores rose significantly. STRATMOR data also show a material decline in those scores, beginning in 2013, driven primarily by non-bank lenders. As of 2016, overall borrower FICO scores averaged 729, the lowest since 2008, before the bottom fell out of the market. Bank originated loans saw average credit scores of 743 last year, as opposed to just 719 for independents.

“A diminishing pool of higher credit borrowers, who had been fueling the majority of purchase and refinance lending, has shifted market activity to lower credit groups,” Chrisman wrote. “More generally, as the industry experiences slower growth due to demographics, affordability, smaller family size, smaller homes, later marriages, higher health care costs, slower immigration, etc., looser underwriting standards (with higher prices) will be a source of growth and a way for lenders to ‘feed the beast.’ In other words, lenders are adjusting guidelines to suit borrowers with an eye towards filling their lending capacity. Even if the loan falls outside one lender’s standards, it may meet another’s. Also, for a higher rate or different terms, the lender might make the loan anyway.”

Chrisman said lenders have already been adjusting guidelines to suit borrowers, with higher loan-to-value and lower credit score mortgages becoming more prevalent.

“Few loan applications are cut-and-dried,” Chrisman said “Most don’t fall within all the parameters defined in a lender’s guidelines. When they don’t, underwriters are instructed to look for what are known as ‘compensating factors’ that offset a borrower’s shortcomings.”

Likewise, Chrisman said, lenders–and investors–are advertising programs aimed at opening up credit to borrowers previously unable to access the mortgage market. “At the same time, forthcoming reporting changes by credit bureaus are expected to improve the credit scores of tens of millions of borrowers, bringing them into acceptable ranges,” he said. “Together, these developments hold the potential to unleash first-time homebuyer demand.”

The question, Chrisman poses: will this be enough to boost mortgage originations? “Unfortunately, probably not, at least in the near-to-mid-term,” he said. “Originators have told STRATMOR that housing constraints are a bigger impediment to volumes than a lack of borrowers. So despite credit score movements, the housing market still faces exceptionally tight levels of inventories, lack of raw land near city centers, insufficient number of finished lots and the lack of an available pool of construction workers. And the fabled millennials–young adult renters–tend to live in more expensive markets along the coasts where affordability remains a challenge to own a home.”