Loosening up of mortgage rules doesn't appear on near horizon

WASHINGTON -- With home prices rising in many markets around the country, some experts speculate that mortgage lenders may start loosening hyperstrict underwriting rules.

Lenders currently want FICO credit scores in the mid-700s, down payments of 20 percent-plus, and tight debt-to-income ratios, even though loans underwritten in the past several years have defaulted at low rates.

But the industry is unlikely to go back to what Frank Nothaft, chief economist of Freddie Mac, the giant federally backed investor, calls "the loosey-goosey standards we had in 2005 through 2007": minimal documentation of income and assets, zero-down payments, and a widespread disregard for applicants' ability to afford payments on the mortgages they sought.

Mr. Nothaft added in an interview, however, that "we have gotten better news on the home-pricing front," which might allay some bankers' fears about making loans secured by assets that are declining in value.

However, there are signs that for certain borrowers, things could get worse. Fannie Mae, the other dominant investor along with Freddie Mac in the conventional mortgage market, is planning an overhaul of its automated underwriting system in October.

Fannie's system plays a huge role far beyond its own business, because lenders often submit borrowers' application data through it to get a quick read on whether a loan meets the baseline tests for eligibility -- even if the mortgage is destined for FHA, VA, or a bank's portfolio.

Although Fannie Mae officials insist that the changes to credit-risk evaluation and other factors won't significantly alter the percentages of approvals that the system generates, they concede that some applicants who are getting green lights for loans won't get them, and others who are on the margins will sail through.

Approvals are likely to be tougher for certain condo loans. Under its current guidelines, Fannie Mae allows lenders to perform a "limited project review" on the financial and other conditions of the underlying condominium community when purchasers put down as little as 10 percent. But under the upcoming changes, applicants making down payments of up to 20 percent will be subjected to a "full project review."

That involves "legal review of the condo documents" and other tasks that can be costly and time consuming. Some lenders may not want to bother with the hassles and expenses of such condo applications.

Other signs that the lending industry may not be quite ready to loosen up: In the latest quarterly survey of banks conducted by the Comptroller of the Currency, 25 percent said they had tightened rules for mortgages in recent months, whereas just 10 percent said they had eased their standards. Two-thirds said their rules remained the same.

A study by mortgage data firm Ellie Mae of new loans closed in June found that credit scores for approved mortgages remain extraordinarily high. Fannie and Freddie's refinancings had an average FICO score of 767 and average equity percentages of 29 percent. Home purchase loans had average down payments of 21 percent and 763 FICOs.

FHA, which used to average somewhere in the mid-600s for FICO scores on approvals, appears to be continuing to cherry-pick applicants as well, based on the Ellie Mae survey data, which the firm says represents approximately one-fifth of all loans originated in June. FHA's average FICO on approved refinancings was 716, up three points from May. For successful home purchase applications, the average FICO score was 701.