Question: With both home prices and mortgage rates rising during the first half of 2018 are lenders doing anything to ease credit requirements so that homes are more affordable?
Answer: Let’s start with some background information.
Mortgages today are far tougher to get than in the recent past – and that’s a good thing.
Back in mid-2006 the Mortgage Credit Availability Index published by the Mortgage Bankers Association stood at nearly 900. This means mortgages were available to just about anyone with a pulse and a signature.
In a sense this may seem ideal for borrowers. Don’t we all want easy credit? In fact too-easy credit was part of the distorted practices which lead to the mortgage meltdown, millions of foreclosures and billions of dollars in lender losses.
In March 2018 the MBA’s Index stood at 177.9. That’s a figure which is far below the 2006 record. It’s also a number which is above the 90 or so reached by the Index in 2012, a time when mortgage financing was just about impossible to obtain.
What these numbers tell us is that when it comes to making a mortgage affordable there has to be some balance. If mortgage qualification standards are too tight then even solid borrowers can’t get financing, homes don’t sell and properties are difficult to refinance. Alternatively, if mortgages are too easy to get – as they were in 2006 – the inevitable result is that toxic loans will be widely originated, financing that will lead to vast numbers of foreclosures.
What Is Affordable?
So what is the proper amount of application ease? It’s a very debatable question. The Urban Institute argues that today’s qualifying standards are needlessly tough.
“The mortgage market operated under reasonable standards in 2001,” said the Urban Institute in a 2017 study. “Using the standards from that year for comparison, we know that the increased reluctance to lend to borrowers with less-than-perfect credit killed about 6.3 million mortgages between 2009 and 2015. That’s too many families missing out on homeownership.”
The reality is that the question of mortgage standards really involves several parties.
If you’re a loan originator you favor easier mortgage requirements because you will then be able to generate a larger number of loans. Not without lots of verifications, however, because if it is later found that the mortgage was incorrectly underwritten the lender can have big problems with regulators and investors.
If you’re a mortgage investor, someone who buys mortgages, easier standards are a concern. The last thing you want is a foreclosed mortgage. You want a nice, fat, accurate, and factual loan file to support the financing you purchase.
As a borrower you have different goals.
First, you want a loan application process which makes sense. Toward this end there is a new, government-designed, Loan Estimate (LE) form. This form has big print and is easy to understand. It tells you how the mortgage is priced and whether or not you have the right to prepay without penalty. You can readily compare loan offers because every residential lender must use the same form.
Second, you don’t want to be buried in paperwork. A 2014 study by VirPack, a document management firm, found that the typical loan application included more than 500 pages of documentation. Most of the paperwork is collected by lenders, but still that’s a lot of detail and complexity.
Today lenders have turned increasingly to artificial intelligence for loan underwriting. As an example, instead of being required to turn in your bank statements for the past few months – including blank pages – many lenders can now get the statements directly from your bank. This means you don’t have to gather and deliver such forms and so the application process is made that much faster and easier. However, faster speed does not mean a loan is more affordable or better priced, it just means it’s faster to process.
Third, you want to use common sense. You may well qualify for a $500,000 mortgage but is that what you really want? Big mortgages mean big monthly payments so maybe you want something more conservative, maybe both a smaller house and a smaller amount of debt.
There is now financing available which allows as much as 50 percent of your monthly income to be devoted to housing costs and monthly debts for such things as student loan payments, auto bills, and student loan costs. So yes, it’s good that such financing is available for those who want it, but do you want half of your income to go to monthly debts? What if you lose a job or your income goes down.
In the end what’s important is that you as a borrower find the level of mortgage borrowing that’s best for you, that’s affordable on your terms and comfortable according to your standards. The real definition of “affordability” is the financing that advances your interests while at the same time protecting you from needless financial hazards.