Easing Lending Standards Could Help More Bay Area Buyers
While getting a mortgage has been considered difficult (at best) these last few years, some reprieve may be coming to applicants for mortgages here in the Bay Area markets. Two significant changes in the lending market go into effect this month and both could impact millions of homeowners trying to qualify for a loan. While these changes also add a degree of risk to the market, they would help reduce the feeling of the marathon-like process that borrowers go through and often feel is more difficult than a Tough Mudder race.
There are roughly 220 million Americans with a credit profile and score, and nearly 7 percent of them have liens or judgements on their credit which impact their ability to obtain mortgage credit. This segment of the market is now getting some assistance as a result of the three major credit rating agencies (Equifax, TransUnion, and Experian) deciding to drop these negative reporting marks on credit profiles if the information isn’t complete. What this means is that the date must include a person’s full name, address, date of birth and social security number. Most liens don’t have such or even most of the info attached to them from the individual they are reporting on, so this will undoubtedly bring more people back into the market that had been previously denied credit or just assumed they were never going to be credit worthy.
Credit reports, however, can have mistakes on them that end up sidelining consumers from qualifying for loans. Roughly 20% of consumers have at least one mistake on one of their three credit reports, according to a Federal Trade Commission study. The concern is that those who do have legitimate liens and judgments against them will get credit that is undeserved, and this is what those citing the risk factors to the market will claim is wrong with this move by the credit agencies.
Along the lines of credit, the second major shift that could positively impact the market is that Fannie Mae and Freddie Mac have decided to allow borrowers to have higher levels of debt and sill be allowed to qualify for a home loan. Both government sponsored enterprises are raising their debt-tin-income ratio limits to 50% of pretax income. Previously, this threshold was at 45%. The move is designed to help borrowers that carry high levels of student debt. The other side of this is that consumers are potentially taking on more debt, which ultimately increases the likelihood of default.
At the end of the day, I feel that the argument for the move is best substantiated by the fact that risk in the market is unbelievably low and default rates are back to historical non-factor levels. During the last housing run-up, anyone was able to receive credit for a mortgage loan. Literally, anyone. But corrections to the underwriting environment have corrected defaults, so much so to the point that younger borrowers with high levels of student loan dict have been left to either wait out the market or try to take on a co-sighner in order to finally own a home. So while there is more risk in expanding the market pool and invite more in, the changes effectively are coming at a time when lenders and investors are fighting over an ever shrinking pie of a market of borrowers. More to follow on this as some data on applications and ultimate approvals will come in the 4th quarter of this year.
For more info or to learn if you can benefit from these market changes, feel free to Email Me