Purchase lending in June was at its highest level since the beginning of the housing crisis and early reports from the third quarter indicate that this trend is continuing. Black Knight Financial Services said today that the 15 percent annual increase in the whole of the second quarter of this year and the apparent 11 percent increase in the third quarter were driven primarily by high credit borrowers, those with credit scores of 700 or better. Only 20 percent of purchase loans in that quarter went to borrowers with lesser scores.
At the same time refinancing is dropping among high-credit borrowers, indicating that there is a refinance "burn-out" after such a prolonged period of low rates. This is tipping average credit scores lower. This, Black Knight says in its latest Mortgage Monitor based on September data, might be mistakenly interpreted as signaling a loosening of credit.
The company's Senior Vice President Ben Graboske explains that the two factors are related. He said that role of high credit buyers in the increase in purchase originations means that year-over-year comparisons show that purchase volumes from lower-credit borrowers are actually flat to slightly down. "Only 20 percent of purchase loans originated in the past three months have gone to borrowers with credit scores below 700. That's the lowest level we've seen in well over 10 years. The weighted average credit score for purchase mortgages has also hit an all-time high of about 755," he said
"At the same time, refinance originations have been steadily declining since March, signaling a degree of 'burnout' as those both interested and able to take advantage of currently low interest rates likely already have refinanced. We've also noticed that prepayment speeds - historically a good indicator of refinance activity - as well as refinance originations have been dropping most significantly among these same high-credit borrowers. In contrast to purchase mortgages, we've seen average credit scores for refinance originations decline, which has some suggesting that credit is loosening for these products. As these higher-credit borrowers - in many cases, 'serial refinancers' who have repeatedly taken advantage of drops in interest rates and their good credit standings - hit 'refi burnout,' and total originations decline, lower-credit borrowers make up a larger share of total volume, and weighted average credit scores for the total population naturally decline. It's not an indicator of loosening credit standards at all."
Black Knight also looked briefly at adjustable rate mortgages (ARMs) which currently have about a 5 percent share of originations, down from a 5 to 10 percent range pre-crisis. There are about 5.7 million active ARMs nationwide, down 57 percent since 2006 and the lowest number outstanding since 2003. Black Knight says this low inventory will limit the market impact of increasing interest rates.
About 1.5 million of the outstanding ARMs are still under teaser rates; about three out of four active loans have already reset. In 2006, on the cusp of the crisis, there were 13.3 million outstanding ARMs 10.7 million of which were in pre-reset status. That is 2.5 and 7 times respectively the number in each category today.
In addition to fewer ARMs being originated, the initial term has changed. In 2005-2006 nearly 60 percent of ARMs originated were 3/1 hybrids. Today 90 percent of ARMs are originated with an initial reset of five years. Black Knight says these longer initial fixed terms increase the likelihood that "whether through refinance of the purchase of a new home - many of these loans won't exist at the point of an ARM reset."
Black Knight also looked at some key Q3 2015 mortgage performance indicators and found that as of the end of the quarter, all but five states had seen reductions in their foreclosure inventories. As Graboske noted, Florida's improvement stands out.
"As of the end of September," he said, "Florida has ended its 8-year reign as having the highest number of loans in active foreclosure in the U.S. Over the past 12 months, the state has reduced its inventory of loans in active foreclosure by 43 percent." The state, however, still has the largest number of properties 90 or more days past due but not in foreclosure. That's nearly twice the national average of 22.5 percent. New York - which has seen only a 19 percent reduction in its foreclosure inventory over the past year - is now the state with the most loans in active foreclosure with New Jersey in third place. Outflow or foreclosure completions has been an issue in both New York and New Jersey since the foreclosure moratorium ended in 2010/2011.
While repeated foreclosure starts were up, first time foreclosure starts in the third quarter were at the lowest level in more than 10 years. Completed foreclosures also fell in the third quarter, down 10 percent from the second quarter and the lowest they have been since 2006.
Brecht March 3, 2015 U.S. News Money
If you've got the itch to ditch
your landlord and take the leap
to homeownership, mortgage rates are still low by historical standards.
But beware because they are expected to begin creeping higher throughout the
"The cost of renting is
really high right now. Rents have been rising and rising," says Lawrence
Yun, chief economist at the National Association of Realtors. "Renters are
getting squeezed, and some want to convert to ownership.".
The NAR expects 30-year,
fixed-rate mortgages to average 3.80 percent in the first quarter. However,
mortgage rates are forecast to start inching higher throughout the year. The
NAR forecasts an average 4 percent rate in the second quarter, 4.3 percent in
the third quarter and 4.7 percent in the fourth quarter.
Economic forces, including an
improving U.S. labor market and faster economic growth, are conspiring to push
mortgage rates higher this year. "The Federal Reserve is likely to
raise short-term interest rates in the summer, which will be a signal for the
rest of the market for rates to go higher," Yun says.
"There's a window of
opportunity for buying and refinancing at crazy-low rates, but it's
closing," says Gina Pogol, loan expert at Charlotte, North Carolina-based
If this is the year you want to
sign on the dotted line and become a homeowner, experts have several suggestions
to help you move quickly through the mortgage approval process.
The overall lending environment
remains stringent, and the best mortgage rates will be awarded to those with higher
credit scores. Your credit score is a three-digit number generated
using information on your credit report, and generally, the higher it is, the
better. Here's what you need to do to get the best rates.
Mind your credit score. "Minimum credit scores required by lenders have steadily dropped, and
mortgage insurers' underwriting guidelines have also loosened a bit, but it's
still a little tough," Pogol says. "Average FICOs of applicants
approved for home loans continue to come down, but they're still hovering
around the 700 mark. Unfortunately, three-fourths of U.S. consumers have scores
lower than 700."
What's an ideal credit
score? "To get the best rate, strive for above 740. That is the benchmark
for A-plus lending," says Jeannie Meronk, assistant vice president and
mortgage loan officer at First State Bank of Illinois.
Visit your lender before you
hit the open houses. Create a game plan that makes
sense for your budget. It pays to talk to a lender about what
you can afford and qualify for before you fall in love with a home
outside your price range.
"It is really important from
a budget standpoint to be shopping in the right price range," Meronk says.
Just because you qualify for a
certain loan amount doesn't mean that is what you should spend. Consider your
monthly budget, and determine what level of monthly payment feels comfortable.
Remember that there will be other costs relating to homeownership, including
property taxes, maintenance and unexpected repairs.
Also know that most sellers
won't take an offer seriously unless you have been preapproved for a
loan. "Preapproval means actually applying for a loan, having your
credit checked and your income documented. Preapproved means that as long as
the property meets the lender's requirements, you can close," Pogol says.
Don't make any changes to your
financial picture. Once you've been preapproved,
this is not the time to open new credit cards, change jobs, transfer large sums
of money or make big-ticket purchases using credit. "Once you are
preapproved, don't apply for any new credit. If you go ahead and finance furniture,
it can mess up the amount that you were preapproved for," Meronk says.
If you are fortunate enough to
have a parent, in-law or relative
who is willing to gift you some or all of your intended
down payment, be sure to talk with your lender about this. You will need
to document this properly with a letter for your lender.
If you are thinking of buying a
rental property, however, gift money can't be used toward a down
payment. It only can be used for a primary residence, according to Meronk.
If you are self-employed,
expect to jump through more hoops. Be
prepared to provide two years' worth of tax
returns. If your income fluctuated from one year to the next,
underwriters will average the income from the two years. Also, underwriters
will look at your income after your business deductions have been taken.
"It often comes as a
surprise to self-employed applicants that their gross income isn't counted by
underwriters. It's their taxable income that's used. So if you write off every
meal and every vacation as a business expense, that comes off the top of your
income," Pogol says.
Organize your financial
paperwork and keep it up to date. If you are shopping for a home, keep a file and drop in new documents as
you receive them, including your most recent pay stub and all pages of your
"Many times applications
sit on mortgage processors' desks because the borrowers have not supplied
everything necessary to get the file into underwriting. If an underwriter needs
additional information or documents, get that in as quickly as possible. In a
busy office, every time your application needs something else, it may be moved
to the bottom of a pile and not resurface for days," Pogol says.
Call your insurance company. Before you close, you will
need to procure a home
insurance policy. "You need to call your insurance agent and tell
them you are buying a house. You need to secure a first year's home insurance
policy before closing. Until I get your homeowners insurance amount, I can't
tell you the exact amount of your payment," Meronk says.
When you are ready to buy a home, your lender will take a long look at your credit scores. Those numbers will play a big part in the terms the lender offers.
If you have bad credit, you may struggle to get approved at all. Even if you have fairly good credit, a few points could mean a difference of thousands of dollars of interest. Boosting your credit score before you apply for a loan can help you get a better rate, and there are a few ways to pull it off.
A recent study by the Federal Trade Commission found one in five consumers had at least one error on a credit report. Some of those errors were big enough to damage the consumer’s credit score. The good news: The credit bureaus have to investigate and remove or correct any errors you find.
Order a copy of your credit reports from all three credit bureaus—Equifax, TransUnion and Experian. By law, you are entitled to a free copy every year through AnnualCreditReport.com. Once you have the credit reports in hand, comb through them and dispute any errors you find with the bureau responsible. The credit bureau has 30 days to investigate and remove errors.
While any debt has an impact on your credit scores, credit card debt is weighted more heavily than revolving debts such as student loans or auto loans. Paying down your credit card debt can boost your credit scores. Most experts say you should aim to keep your credit card debt at no more than 10% to 30% of your available credit limit.
Under the FICO model, bill payment history accounts for 35% of your credit score. Even one late payment is enough to drag down your scores, but you may be able get the black mark removed simply by asking your creditor. Known as a “goodwill deletion,” the creditor may be willing to remove the late payment information if you have an otherwise spotless history with the company. However, creditors aren’t usually willing to do this if you have a history of late payments.
If you are working on improving your credit scores before you apply for a mortgage, you may be tempted to cut up your old, unused credit cards and close the accounts. Don’t! That will backfire. The length of your credit history accounts for 15% of your credit score. By closing your oldest accounts, you are shortening your overall account length, which will only hurt your credit score. Instead, once you pay off a credit card, tuck it away in a drawer and keep the account open to keep building on your credit history’s length.
Once you have taken steps to lessen the damage of your past, do not let history repeat itself. Aim to pay all of your bills on time each month. Every timely payment you make will add to the positive history on your credit report. Over time, you will see your scores improve across the board.
Laura Sherman contributed to this article.