Higher mortgage rates may mean easier credit
Monday, 5 Aug 2013 | 10:23 AM ET
As mortgage rates rise and refinancings fall dramatically, banks are in search of new business. That, in turn, has them easing lending standards for some borrowers, according to a new monthly survey from the Mortgage Bankers Association.
Credit availability rose 2 percent in July and is up 3 percent from May, when interest rates began their climb, according to the MBA index.
“The increase was primarily driven by increases in product offerings that allow cash-out refinancing, and some increase in offerings for borrowers with higher LTVs, or lower credit scores,” according to the report.
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It is likely no coincidence that standards are easing as rates rise and mortgage applications fall. Total mortgage applications were down 47 percent last week from a year ago. Refinances, which had been the banks bread and butter during the housing crash, are down 59 percent from a year ago. Applications to purchase a home are up just 5 percent.
“People see interest rates rise, they slow down some of that eagerness to get into the market,” said David Stevens, CEO of the Mortgage Bankers Association in an interview on CNBC’s “Squawk Box.”
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Credit standards tightened dramatically over the past several years, as loose credit was largely blamed for the crash in housing. Average borrower credit scores on new loans are dramatically higher today, and lenders require larger down payments.
Even the FHA, the government mortgage insurer, which was created to help lower creditworthy borrowers, has raised its standards as well as its insurance premiums. Many lenders have overlays to their guidelines that they add on top of standard conventional guidelines. They could do that because refinances were so high, they needed to slow the volume in order to process all the loans.
“As volumes slow, it makes sense that originators might ease some of their overlays as they now have the additional bandwidth to focus on slightly lower-quality loans or those loans that require more intense underwriting prior to approval, such as loans for self-employed individuals or investors that own multiple homes,” said Craig Strent, CEO of Maryland-based Apex Home Loans.
“Competition for loans, particularly for home purchases, will continue to rise as refinances wane and originators look for continued loan volume to support the infrastructure they put in place during the recent refinance wave.”
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Banks have already begun laying off workers in their mortgage departments, as refinance volume slows. Purchase applications are higher, but as rates rise, home sales are slowing. The easing is likely taking place on smaller loans that carry less risk for banks.
Just a few years ago, customers were complaining that banks were not processing loan applications fast enough. Banks had responded that they were swamped with business.
—By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick.