Stuck between a rock and a hard place, some mortgage lenders are choosing to relax underwriting requirements ever so slightly to offset a dramatic drop in loan origination volumes.
Most of the changes are to the "overlays" that mortgage bankers put on loans headed for sale into the secondary market. An overlay is a requirement that an originator adds above and beyond what the loan's purchaser demands; the buyer may accept certain loans with FICO scores as low as 600, for example, but the originator won't make them to borrowers with a score lower than 640.
"We're looking at our overlays now and thinking maybe it would be a good idea to loosen our belt," said Kevin Marconi, the chief operating officer at United Fidelity Funding, a wholesale and retail lender in Kansas City, Mo., whose volume has dropped by a third this year. "There's a risk and a reward to making a decision on which to relax."
Brian Simon, the chief executive of Caliber Funding LLC, an Irving, Tex., lender backed by the $23 billion Dallas private equity firm Lone Star Funds, said some lenders are allowing higher combined loan-to-value ratios and total debt-to-income ratios.
"You're seeing lenders picking and choosing where they can get the most done as volume has fallen off a cliff," he said. "I do think a relaxation of guidelines is a little bit of desperation."
To be clear, the relaxation is nowhere near the willy-nilly underwriting that was widespread prior to the downturn. Most lenders remain uber-conservative, fearful of having to buy back faulty loans.
Mortgage insurer Radian Guaranty Inc. plans next month to drop its FICO score requirements to 620 from a standard score of 720 to promote its new "One Underwrite" program, a product it rolled out to compete with the Federal Housing Administration.
"We're actually trying to show how lenders are leaving opportunities on the table that are excellent credits," said Scott Theobald, an executive vice president and chief risk officer at Radian. "I still find myself trying to petition customers to take more risk, that are good quality credits. We think they are turning down business that would be profitable for both the lenders and for us."
Steve Emory, a senior mortgage banker at Northwest Mortgage Group Inc. in Portland, Ore., said that even when banks and mortgage insurers announce some easing of guidelines, it costs more to originate a privately insured loan with a 620 FICO score than to originate loans for FHA.
Radian, for example, requires higher reserves and will not allow gift down payments, so most lenders will go with FHA, which allows higher debt-to-income ratios, no reserves and easier appraisal reviews.
"On the fringes and in the marketing departments they're loosening guidelines, but on the street level, no, there is no loosening," Emory said.
Buck Hawkins, senior vice president of capital markets at Castle & Cooke Mortgage LLC, agreed.
"The mortgage insurers have loosened up but most of the aggregators are scared to allow these enhancements out of fear the [mortgage insurance] companies will not pay out on the claim," Hawkins said.
Still several lenders, including Plaza Home Mortgage Inc. in San Diego, are now accepting FICO scores of 580 on FHA loans, after previously requiring scores of 620 or higher, but they are demanding a minimum down payment of 10% and low debt-to-income ratios.
Wells Fargo & Co. set off the trend of lowering credit overlays in January when it started accepting applications at its retail branches for FHA loans from borrowers with FICO scores as low as 500, becoming the first major lender to do so following pressure from the agency and housing advocates. The National Community Reinvestment Coalition, filed a redlining complaint with the Department of Housing and Urban Development, the FHA's parent agency, against 22 smaller FHA lenders.
Then-FHA Commissioner David Stevens urged lenders in the federal mortgage insurance program to lower their minimum credit scores. (Stevens is now the president and CEO of the Mortgage Bankers Association.)
But the easing of overlays isn't doing much to move the needle. Credit is as tight as it's ever been, said Kevin Parra, Plaza Home Mortgage's president and CEO. "It's hard to get a loan," he said.