Harney: Are lenders playing a numbers game?

FICO scores are the dominant credit risk measure used in the mortgage field. Scores run from 300, which indicates a high risk of default, to 850, which signifies the lowest risk.

In January, according to Ellie Mae’s latest report, the average FICO credit score for applicants who closed on nongovernment mortgages to purchase homes was 752. During the course of the year, it has risen steadily to 757 in July, the latest month surveyed. That’s a higher average than during any month in 2014, and well above prevailing scores during most of the past 15 years.

Federal Housing Administration loans show a similar pattern: Mortgages closed during January had average FICO scores of 682. In July, they averaged 689, five points higher than the average for 2014. Veterans Affairs loan scores are also up — 709 in July on average compared with 704 in January and 701 in December.

• The average FICO score for American adults was 695 in April, according to FICO. Though credit scores represent just one element in a mortgage application — debt-to-income ratios, down payments and documented income are at least as important — the average American consumer’s score comes nowhere near what’s been typical in the nongovernment (“conventional”) mortgage marketplace, which is significantly larger than the government (FHA-VA) marketplace. Conventional loans typically are originated for sale to giant investors Fannie Mae and Freddie Mac. Both corporations say their minimum acceptable credit scores are 620 FICOs; FHA accepts scores as low as 580. Lenders, however, are free to set their own, higher limits, and many do.

So what’s going on? Are lenders cherry-picking when it comes time to approve applications? Or are other factors at work here?

Most lenders I’ve spoken with insist that loan terms have eased in recent months, including modest declines in acceptable FICO scores. Bill Banfield, a vice president at Quicken Loans, the largest nonbank mortgage originator, says “there have been a lot of changes” to underwriting guidelines that should allow greater numbers of buyers to qualify for a loan. Though Banfield would not discuss average credit scores at Quicken, he noted that the company is approving qualified applicants for FHA loans who have FICO scores down to 580.

Dan Keller, a mortgage adviser with New American Funding in Kirkland, says small movements in average scores on closed loans are no big deal because “a credit score today isn’t getting in the way of getting a mortgage” — it’s rarely the back-breaker for an application. Underwriting systems judge potential borrowers on their total package, not just one factor, such as credit scores.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, told me that part of the seeming conflict between the credit availability report and Ellie Mae’s statistics can be traced to the fact that they are measuring different things. The MBA survey examines what terms lenders are offering — their menus and requirements that are available to consumers. These have definitely loosened up during the past year, though maybe the word hasn’t gotten out sufficiently to consumers, he says. The Ellie Mae report, by contrast, focuses on the end result of actual applications. Some borrowers may have acceptable credit scores but negative issues elsewhere in their applications.

That’s one theory. But the bottom line for consumers is: who gets approved, who doesn’t? And the statistical evidence suggests that it is increasingly people with higher scores on average, not lower, who are making the final cut.

Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.