Credit Getting Easier

According to the most recent monthly Origination Insight Report (OIR) from Ellie Mae, Credit restrictions that have been hampering the real estate and mortgage market have been easing.

Data from the OIR report shows that the average FICO credit score for potential mortgage loans has fallen.  Ellie Mae is a software provider that aggregates and analyses mortgage origination activity.

The Ellie Mae OIR report is based on a sampling of data from a “robust 44%” of all applications that go through its system.  It analyzes the characteristics of loans that were approved or denied, along with factors like credit scores, loan-to-value (or LTV) data, and debt-to-income (or DTI) ratios.

According to OIR data, “After plateauing at 750 for most of late summer and fall, average FICO scores for approved loans have fallen to 734, which is approaching normalcy.”    This compares to the “bubble years,” where “credit was very lax,” when average FICO scores were around 720 for 2005, 2006, and 2007.  After the mortgage market meltdown credit became very tight, and average FICOs increased to 757.  The refinance market currently is in decline and lenders are taking more risk in order to generate more business.

The Qualified Mortgage (QM) rule was intended to have eased credit according to the Consumer Financial Protection Bureau (CFPB).  The QM had set new standards for new mortgage applications that focused on the consumers ”ability to repay” the mortgage loan.   Exotic mortgages like negative-amortizing (pick-a-pay) loans or high-cost loans were made ineligible for qualified mortgages.

The restricted credit market has hurt both consumers and homebuilders alike.  It hurts them in that some of the potential customers are unable to qualify for a loan, with many of these customers being move-up buyers who need to sell their starter homes.  A difficult job market, as well as the unforgiving credit market, has also squeezed first-time buyers.

As credit conditions ease and consumer balance sheets are repaired, homebuilders can expect increased activity for the next few years.