Mortgage approval rates have risen nearly 20 percent over the past 12 months yet there is virtually no evidence that lenders are relaxing underwriting standards, according to the February originations report from Ellie Mae.
In February some 56.8 percent of all mortgage applications, both purchase mortgages and refinancings, were approved by lenders using Ellie Mae’s Encompass360 software, which handles about 20 percent of all U.S. mortgage originations. That’s an increase of 18.6 percent from the 47.9 percent approved a year ago. Approval rates have risen quickly in recent months. For 2012, the average closing rate for all mortgages was only 49 percent, 15.9 percent below the February closing rate.
Home buyers taking out a purchase mortgage to buy a home have been more successful than homeowners seeking to refinance. Some 61.7 percent of home buyers were approved for a mortgage in February compared to 54.7 percent of refinancing homeowners.
The data show almost only a slight decline in only one of the three key factors lenders use for mortgage approvals: FICO scores, loan to value ratios and debt to income ratios. Loan to value ratios have risen to 80 today compared to 76 a year ago, an increase of 5.2 percent but median FICO scores for all approved loans are less than one percent lower than they were a year ago, down from 750 to 745. Debt to income ratios are exactly the same as a year ago: 23 percent and 35 percent when mortgage payments are included.
Despite the improved percentage of approvals, mortgages are taking a little longer to process than a year ago. Purchase loans took 47 days to close in February, slightly longer than the 45 days it took a year ago. Refinancings are taking significantly longer today than a year ago, 50 days compared to 44 days.
The Federal Reserve’s policy of buying mortgage-backed securities to keep mortgage rates low may be bolstering upper tier home values rather than helping to make homeownership more affordable for entry-level buyers.
For decades home buying demand has directly reflected mortgage interest rates, but no more. One question that has baffled policy makers for six year is: Why haven’t housing markets responded to historically low mortgage rates?
In fact, record low rates have had an impact, according to a new analysis by three contributing editors of Home Value Forecast, just not the impact that the Fed anticipated.
“It is very likely that the top tiers of the owner occupied housing market are the ones benefiting the most from lower mortgage rates as this group has been less affected by credit score downgrades or more restrictive underwriting,” the economists said.
Since the housing crash in 2008, the economists, James R. Follain, Norman Miller, and Michael Sklarz, argue three factors have made lower mortgage rates relatively useless for lower income buyers.
- Credit scores for many households have been impacted by defaults, loan modifications, foreclosures, job losses and the breadth of the impact has been sufficient to affect millions of households who now must become or are already renters. Even though buying may be cheaper than renting, such households have little choice but to sit on the sidelines for a few more years.
- Tight underwriting has increased both the time required to secure a mortgage loan and the challenges for those with less secure income streams. Those paid based on self-reported productivity are being affected more severely since the lenders are now requiring more conservative assumptions on future earnings. Appraisals are also being kicked back if they are not conservative in the selection of appraisal comps, and so the risk tolerance pendulum has swung towards extreme conservatism.
- The investment appeal of housing and presumption that prices can only go up has lost its shine. Many households had stretched in the 2000-2005 run up and some even invested in second homes or investment properties hoping to flip these units at higher prices. Those late to the party got burned.
The economists analyzed the impact of low rates for fixed rate mortgages on sales in two major markets, Chicago and Phoenix,
“Affordability is definitely improved when mortgage rates are lower and yet the beneficiaries of these more attractive mortgage rates are not evenly distributed among households of all incomes and wealth. It is very likely that the top tiers of the owner occupied housing market are the ones benefiting the most from lower mortgage rates as this group has been less affected by credit score downgrades or more restrictive underwriting,” they concluded.
“At the same time we expect that investors have supported the lowest price tiers and are now bidding up the remaining REO sales in an attempt to lap up what is left of distress. Prices in the bottom housing price tiers are still dealing with foreclosure inventory hangovers in some markets with slow and clogged foreclosure systems. Markets where distress has been dispatched more expediently seem to be recovering the fastest,” they said.