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Lending

Tighter underwriting standards squeeze mortgage credit

Credit contraction fueled by declines in long-term loan availability

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Mortgage credit availability declined in September, suggesting a gradual tightening of lending standards, the Mortgage Bankers Association reported Tuesday.

Credit availability continues to weigh on the market as more lenders remove key product offerings such as loans with terms greater than 30 years and/or interest-only features, explained Mike Fratantoni, the MBA's vice president of research and economics. 

"Just as before, we believe this reflects lenders implementation of the ability to repay/qualified mortgage regulation which comes fully into effect in January," Fratantoni stated.

He added, "Offsetting this tightening has been some increased willingness to offer higher LTV loans, particularly to jumbo borrowers."

The Mortgage Credit Availability Index decreased 0.7% to an index score of 110.7 in September, following a similar decline in August.

The decline last month was driven by shifting borrower eligibility requirements on jumbo loan programs, offsetting increases and decreases to the index, the MBA explained.

Other industry experts are attributing the continued tightening of credit standards to banking institutions relying on high credit scores rather than considering a potential borrower’s actual ability to repay a loan.

"The irony is banks are sitting on tons of cash, refinancing has declined, and they have a motive to increase loan origination because their lending staff have less work to do and the funds are just unproductively sitting there," said National Association of Realtors spokesperson Walt Molony.

For instance, the average mortgage acceptance FICO credit score on conventional loans was 761 in the second quarter of 2013, while the average rejection score was 726, NAR pointed out.

NAR believes a return to normal, safe and sound mortgage underwriting standards would allow more financially qualified buyers to enter the market and boost home sales by 10% to 15%.

"In the meantime, the government shutdown means delays can be expected in the loan approval process — largely because the IRS isn’t processing document requests," Molony said.

The biggest hurdle is the halt in verifying a borrower’s income directly from the IRS, using the required 4506-tax transcript, which is now hard to get with the shutdown in effect.

Recently, Mortgage Bankers Association CEO David Stevens said that any glitch in the loan process, especially in relation to closings, is a problem.

Additionally, Freddie Mac issued temporary guidance to lenders to minimize disruptions to operations as the nation enters week two of the government shutdown.

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