TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 21 Feature By Carrie Bay T he deluge of mortgage defaults and foreclosures that has plagued the industry over the past half- decade was set into motion by a subprime mortgage crisis characterized by lax lending standards, easy credit, and higher-risk mortgage products. Regulatory changes surrounding mortgage underwriting were explicitly outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act and seek to limit risky mortgage characteristics linked to higher rates of default. For example, the Ability-to-Repay rule instituted by the Consumer Financial Protection Bureau (CFPB) requires lenders to make a "reason- able and good-faith determination" that a loan applicant has a "reasonable ability to repay the loan." Before approving a mort- gage, lenders must evaluate and verify a number of measures, such as the applicant's income or assets, employment, and other debt obligations. These new underwriting standards are designed to protect consumers from certain risky loan features—such as negative amortization or interest-only—that allow borrowers to take out mortgages they cannot afford. While safeguards such as the Ability-to-Repay rule codify what many consider to be com- monsense lending principles, a 2012 study published by the University of North Carolina's Center for Community Capital and the Center for Responsible Lending concluded "underwrit- ing thresholds such as minimum credit scores and loan-to-value (LTV) ratios are a blunt policy instrument to sort credit risk that may disproportionately disadvantage" groups of prospec- tive borrowers, particularly first-time homebuyers and low- and moderate-income households. Industry data show average down payments for mortgages, which correlate to LTV ratios, are already on the decline—the result of a five-year recession that left many Americans finan- cially strapped and unable to build up their savings. According to a report released in late April by LendingTree, down payments for 30-year fixed-rate loans fell to an average of 15.78 percent in the first quarter of this year, down from 16.01 percent in the fourth quarter of 2013. At the same time, the company found average credit scores for borrowers matched with lenders on its net- work dropped 6 percent year-over-year, opening up the credit pool to a wider population of borrowers. "As the housing market improves and refinance activity declines, lenders are adapting their guidelines to improve credit accessibility for borrowers," said LendingTree founder and CEO Doug Lebda. "Relaxed lending guidelines translates to a larger pool of qualified homebuyers that could boost the housing recov- ery. While lenders still need proof that a borrower has the finan- cial ability to repay the loan, lenders have started to accept lower down payments and credit scores from potential borrowers."