STRATMOR Group released the May edition of its STRATMOR Insights report. This month, STRATMOR Senior Advisor Rob Chrisman looks into the changing credit landscape, and what that means for mortgage originations. As Chrisman explained, after perhaps overcorrecting in the wake of the 2008 financial crisis, underwriting standards are beginning to loosen once again in an attempt to broaden the reach of the mortgage market to more borrowers.
“STRATMOR data shows that after the financial crisis in 2008, borrowers’ average credit scores rose significantly,” Chrisman said. “It also shows a material decline in those scores, beginning in 2013, driven primarily by non-bank lenders. As of 2016, overall borrower FICO scores averaged 729, the lowest since 2008, before the bottom fell out of the market. Bank originated loans saw average credit scores of 743 last year, as opposed to just 719 for independents. A diminishing pool of higher credit borrowers, who had been fueling the majority of purchase and refinance lending, has shifted market activity to lower credit groups. More generally, the mortgage industry is dealing with slower growth, due to a variety of factors, including demographic and lifestyle changes and home affordability. Looser underwriting standards – with risk-based pricing – are a way for lenders to counter those headwinds.
“We’re already seeing lenders adjusting guidelines to suit borrowers with higher loan-to-value and lower credit score mortgages becoming more prevalent,” Chrisman continued. “Likewise, lenders – and investors – are advertising programs aimed at opening up credit to borrowers previously unable to access the mortgage market. At the same time, forthcoming reporting changes by credit bureaus are expected to improve the credit scores of tens of millions of borrowers, bringing them into acceptable ranges. Together, these developments hold the potential to unleash first-time homebuyer demand. The question is, will this be enough to boost mortgage originations? Unfortunately, probably not, at least in the near-to-mid-term. Originators have told STRATMOR that housing constraints are a bigger impediment to volumes than a lack of borrowers.”
This month’s report also features select findings from STRATMOR’s recent Spotlight Survey on perceived benefits and barriers to adoption of the Digital Mortgage. Based upon respondents’ expectations of the top benefits of adoption – increased borrower satisfaction, faster cycle times and increased transparency for borrowers – it is clear that lenders view Digital Mortgage as a way to improve the borrower’s experience. Systems and vendor integration and difficulty in getting loan officers to adapt to new processes and behaviors were both cited as leading barriers to adoption, as was cost.