Mortgage lending keeps getting tighter as the move away from FHA loans takes shape in the marketplace.
Case in point, the average FICO score on closed, first-lien loans hit 750 in October, which is up from 741 last August, Ellie Mae said.
Ellie Mae analyzes data on loan applications that pass through its Encompass360 mortgage software. While that data only accounts for 20% of all originations, it gives a snapshot of what types of loans are being accepted and closed, as well as denied.
Furthermore, the credit score on denied applications also rose from a year ago, suggesting credit standards actually tightened during the same period. But Jonathan Corr, COO of Ellie Mae, says in reality the higher FICO average shows more consumers moving to conventional loans as less FHA-business is written in the marketplace.
"What's changing is the FHA's percentage of loans in the past nine months has actually come down," said Corr. Those loans generally allowed for lower FICOs and LTVs, but now that FHA is insuring less, other loan products are more in the mix and their underwriting points may be a bit higher.
"FHA tends to have a lower FICO, higher LTVs and higher DTIs," said Corr. "If the percentage of FHA business is going down, you are going to see a shift upwards in terms of what is closing if the mix of loans has shifted," he said.
The average FICO on denied applications hit 706 in October of 2012, which is up from 700 in October of 2011 and 697 in September of 2011.
The loan-to-value ratio on average closed loans hovered at 78 last month, up from 76 in October of last year.
On denied applications, the average LTV hit 87 in October, up from 82 in August of 2011.
The closing rate, on the other hand, seemed to improve over the same period, hitting 54.5% in October, up from 47.1% in November of 2011.
The idea that lending is now tighter and only available to the highest quality borrowers is certainly not new to the marketplace. In recent public statements, Federal Reserve Board Chairman Ben Bernanke suggested lending may now be too tight.