Do you want to buy a house but worry that your credit profile will disqualify you for a mortgage? Take another look: A new study suggests that you might find lenders a little friendlier and more flexible than you thought. According to the Urban Institute Housing Finance Policy Center’s latest quarterly credit availability report, mortgage lenders are reaching out to borrowers who might have been marginal — or rejectees — in the past. Lenders are increasing their appetite for at least slightly riskier applicants — people with lower credit scores, higher debt-to-income ratios, smaller down payments and other issues.
The institute’s study suggests that Fannie Mae and Freddie Mac, the dominant players in the market, both have been taking on more risk “steadily since the financial crisis.” The Federal Housing Administration, Department of Veterans Affairs and the Department of Agriculture’s rural home loans program have pushed risk to “the highest level since 2009.” Portfolio and “private label” lenders — a category that ranges from giant banks to independent mortgage companies — have also been reaching deeper into the credit pool, but risk for them remains near record lows.
If you’re a credit-strained buyer, this may sound just fine. But there’s potentially a darker side: If you’re a taxpayer worried about more billion-dollar bailouts, this can look ominous. Could this steady increase in risk put us on course to another toxic-loan crisis? Laurie Goodman, vice president of the Housing Finance Policy Center, says not to worry. She told me that current lender risk levels are still well below historical norms, specifically the “reasonable lending standards” that prevailed in 2001 through 2003, before the boom. “Significant space remains to safely expand the credit box,” according to Goodman’s analysis in the latest report.
Great. But not everybody in the mortgage industry is convinced by such assurances. John Meussner, executive loan officer with Mason-McDuffie Mortgage Corp. in San Ramon, Calif., sees hints of trouble ahead. “I have definitely noticed a fast uptick in ‘creative’ (loan) products coming out,” he told me. “Recently we saw one investor roll out a product offering up to $2 million in financing for FICO scores down to 600.” The loan allows borrowers to have made a late payment on a mortgage within the past 12 months and have multiple credit incidents (such as a bankruptcy or foreclosure). The loan also requires the borrower to have just three months of reserves for loan amounts to $1 million. “This is something we haven’t seen since before the crash,” said Meussner.
