Mortgage Guidelines Resume Tightening Nationwide

Senior Loan Officer SurveyDespite an improving U.S. economy, the nation’s banks remain cautious about what they will lend, and to whom.

Last quarter, by a margin of 3-to-2, more banks tightened residential mortgage lending standards for “prime borrowers” than did loosen them.

A “prime borrower” is defined as one with a well-documented credit history, high credit scores, and a low debt-to-income ratio. The insight comes from the Federal Reserve’s quarterly survey of its member banks.

Last quarter, of the 54 responding banks :

  • 0 banks tightened mortgage guidelines considerably
  • 3 banks tightened mortgage guidelines somewhat
  • 49 banks left guidelines basically unchanged
  • 2 banks eased mortgage guidelines somewhat
  • 0 banks eased mortgage guidelines considerably

By contrast, in the quarter prior, not a single surveyed bank reported tighter residential mortgage guidelines. The period from January-March was a step backwards, therefore, for the fledgling U.S. housing market.

Overall, getting approved for a mortgage is tougher than it used to be. Banks enforce higher minimum credit score standards; ask for larger downpayment/equity positions; and require higher monthly income relative to monthly debt obligations.

It’s one reason why the homeownership rate is at its lowest point since 1997.

Another reason why homeownership rates may be down is that prospective home buyers believe the hurdles of today’s mortgage approval process may be impassably high. That’s untrue.

There are many U.S. homeowners and renters that were approved for a home loan last quarter — prime borrowers or otherwise. Some had excellent credit, some had modest credit. Some had high income, some had moderate income. Many, however, took advantage of low-downpayment mortgage options such as the FHA’s 3.5% downpayment program, and the VA’s 100% mortgage program for military veterans.

Despite a general tightening in mortgage standards, loans are still available and banks remain eager to lend.

It is harder to get approved today as compared to 5 years ago, but for those that try and succeed, the reward is access to the lowest mortgage rates in a lifetime. Mortgage rates continue to push home affordability to all-time highs.

If you’re in the market to buy a new a home or refinance one, your timing is excellent.

The Fed Starts A 2-Day Meeting Today. Make A Strategy.

Fed Funds Rate vs Mortgage Rates 1990-2012

The Federal Open Market Committee begins a 2-day meeting today in the nation’s capitol. It’s the group’s third of 8 scheduled meetings this year. Mortgage rates are expected to change upon the Fed’s adjournment.

Led by Chairman Ben Bernanke, the FOMC is a 12-person, Federal Reserve sub-committee. The FOMC is the group within the Fed which votes on U.S. monetary policy. “Making monetary policy” can mean a lot of things, and the action for which the FOMC is most well-known is its setting of the Fed Funds Funds.

The Fed Funds Rate is the overnight interest rate at which banks borrow money from each other. It’s one of many interest rates set by the Fed.

However, one series of interest rates not set by the Fed is mortgage rates. Instead, mortgage rates are based on the prices of mortgage-backed bonds and bonds are bought and sold on Wall Street.

There is little historical correlation between the Fed Funds Rate and the common, 30-year fixed rate mortgage rate.

As the chart at top shows, since 1990, the Fed Funds Rate and the 30-year fixed rate mortgage rate have followed different paths. Sometimes, they’ve moved in the same direction. Sometimes, they’ve moved in opposite directions. 

They’ve been separated by as much as 5.29 percent at times, and have been as near to each other as 0.52 percent.

Today, that spread is roughly 3.65 percent. It’s expected to change beginning 12:30 PM ET Wednesday. That’s when the FOMC will adjourn from its meeting and release its public statement to the markets.

The FOMC is expected to announce no change in the Fed Funds Rate, holding the benchmark rate within in its current target range of 0.000-0.250%. However, how mortgage rates respond will depend on the verbiage of the FOMC statement. 

In general, if the Fed acknowledges that the U.S. economy as in expansion; growing from job growth and consumer spending, mortgage rates are expected to rise. If the Fed shows concern about domestic and global economic growth, mortgage rates are expected to fall. 

Any time that mortgage markets are expected to move, a safe play is to stop shopping your rate and start locking it. Today may be one of those times.

Banks Start To Loosen Up In Underwriting

FOMC senior loan officer survey 2011 Q4

After a half-decade of tightening mortgage guidelines, banks are starting to “loosen up”.

The Federal Reserve conducts a quarterly survey of its member banks and, last quarter, not a single responding bank reported having tightened its mortgage guidelines for prime borrowers.

A “prime borrower” is defined as one with a well-documented credit history, high credit scores, and a low debt-to-income ratio.

53 banks responded to the Fed’s survey and none said that mortgage guidelines “tightened considerably” or “tightened somewhat” between September and December 2011; 50 said that guidelines remained “basicaly unchanged”; 3 said that guidelines “eased somewhat”.

Mortgage applicants sometimes remark that the mortgage approval process can be challenging. Last quarter’s Fed survey hints that looser standards are coming. 

Not since before the recession have banks lowered mortgage approval standards like this and it bodes well for this year’s  housing market. Real estate agents report that 1 in 3 home sale contracts fail with “declined mortgage applications” as a leading cause.

Looser mortgage lending standards should mean more home loan approvals for buyers, and fewer contract cancellations. This can spur the housing market forward.

Make note, though. “Looser standards” should not be confused with ”irresponsible standards”. It remains more difficult to meet bank standards as compared to 5 years. Today’s underwriters are more conservative with respect to household income, overall assets and credit scores. 

Even as compared to one year ago:

  • Minimum credit score requirements are higher
  • Downpayment/equity requirements are larger
  • Maximum allowable debt-to-income ratios are lower

For buyers and refinancing households gaining approval, though, the reward is the lowest mortgage rates in a lifetime. Mortgage rates continue to fall, helping home affordability reach new highs.

If you’re in the market to buy a new home or refinance one, your timing is excellent.