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Mortgage Originations: The Good, The Bad, And the Ugly in 2014

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Th e M Rep o RT | 31 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ORIGINATION the latest ORIGINATION lenders step Up as June closings rise Mixed month-to-month changes continue the slow march onward. W hile the time it took to close a loan in June increased just slightly from the previous month, the closing rate reached a record high of 61 percent, according to Ellie Mae's Origination Insight Report. Among loans originated 90 days before the report, 60.7 percent closed in June, the report states. This is up from 57.8 per- cent in May. "Clearly, lenders are working harder than ever to convert and close loans," said Jonathan Corr, president and COO of Ellie Mae. However, the time it takes to close a loan is on the rise. After three months of increases, the number of days it took to ap- prove a loan closed in June was 41 days. Despite the monthly in- creases, however, loans are clos- ing faster than last year, when it took 47 days to close a loan. Refinance loans closed in June took an average of 39 days to close, while purchase loans took 42 days to close. The market continues to be dominated by purchase loans, although the share of purchase loans did tick down slightly over the month of June, from 66 per- cent in May to 65 percent in June. Corr attributes the slight decline to a dip in interest rates, which could have spurred more refinances and "may also have prompted more borrowers to se- lect 30-year fixed-rate mortgages, which may be why the percent- age of 15-year loans hit lowest points for the year last month." The average interest rate for a 30-year loan in June was 4.42 percent, down from 4.53 percent in May. Approved loans continue to go to applicants with high FICO scores. For loans closed in June, applicants had an average FICO score of 728, up slightly from 727 in May, but down significantly from an average of 738 over last year. However, close to one-third of loans closed in June—32 percent— had FICO scores under 700. This is unchanged from last June. Loan-to-value ratios on closed loans have held steady so far this year at 82 percent, and debt- to-income ratio has remained the same since March at 24/37, according to Ellie Mae. Denied loans in June had lower FICO scores and higher debt- to-income ratios than approved loans, but loan-to-value ratios were the same. FICO scores for loans denied in June averaged 686. Debt-to-income ratios for denied loans averaged 28/45. recalibrated credit model expected to raise scores De-emphasizing medical debts could give scores a small boost. t he company responsible for one of the most-widely used measures of credit health is making changes to its current model that could boost credit scores nationwide. In an announcement in early August, analytics and decision management firm Fair Isaac's Corporation (FICO) said its new credit model, FICO Score 9, "introduces a more nuanced way to assess consumer collection information," resulting in greater precision for lenders measuring a borrower's credit stability. The model will be available to lend- ers through the country's various reporting agencies starting in the fall. "FICO Score 9 uses a more re- fined treatment of consumers with a limited credit history and those with accounts at collection agen- cies, so that lenders can grow their credit and loan portfolios more confidently," said Jim Wehmann, EVP for Scores at FICO. The key difference in the new model is that strikes from medi- cal collections will have a lower impact, reflecting the relatively low level of credit risk they represent. From just that change, the company expects the median FICO score will increase by 25 points among consumers whose only credit dents come from unpaid medical debts. FICO isn't alone in its push to reassess how medical debts are reflected on a borrower's credit profile. In May, the Consumer Financial Protection Bureau (CFPB) released the results of a study finding that credit scores may underestimate creditworthiness by as much as 10 points for consumers owing on medical costs and by up to 22 points for consumers who have repaid their debt. Often, consumers aren't even aware their debt has been sent to collections, CFPB said. Another change in the FICO Score 9 model is that it will also discount any overdue payments that have already been made, leaving only unpaid collections as a mark. While the changes may have a significant impact on approval rates for credit cards and auto loans, the effects will be more subtle for borrowers and lenders in the mortgage space, says Greg McBride, chief financial analyst for personal finance website Bankrate.com. "These changes are going to be a positive for consumers, but it's not something that moves the goalposts," McBride said in a phone call. "These changes aren't going to take a consumer with bad credit and suddenly make them appear as if they have good credit." Rather, for consumers whose credit scores sit on the threshold between poor, adequate, or good, the expected boost could make a difference in terms of required down payments or interest rates. The Score 9 model also promis- es to help lenders make decisions on consumers with little to no credit history—though McBride doesn't expect to see an immedi- ate impact in mortgage approvals for credit-lacking millennials. However, if those young con- sumers have an easier time securing lines on smaller loans, however, that could balloon out into the mortgage space in the future. "You [have to] knock over the dominoes," McBride said.

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