Five or six years ago if you had a pulse you could get a mortgage. Basically no questions asked. But over the last 2 or 3 years you could have an 800 credit score, put down 50%, have $1 million in reserves, a debt-to-income ratio of 5%, and the bank would make you source a $500 deposit. Why the change? Well, some of it was the banks had been burned and foreclosures were high. It was too easy to get a mortgage pre-2008 and many people obtained mortgages who shouldn’t have. Also, rates were low, refinances were high, and the banks were making a ton of money. They could be tough and get away with it. Why lend to someone with a 620 credit score when you could lend to someone with a 750 credit score? Now, all that’s about to change.
In mid 2013 rates started to rise, refinances slowed, and mortgage applications in the 4th quarter of 2013 dropped 43%. Currently, refinances are all but gone. Over the last 6 months banks and mortgage companies have let thousands of employees go. At the same time, regulations have increased and the cost of originating a mortgage has become more and more expensive. Plain and simple; the banks and mortgage companies need more business. Just taking the 750 credit score customers will no longer work. Just this week Wells Fargo announced they are dropping their minimum credit scores on FHA loans to 600. Also, JPMorgan announced they are lowering their LTV standards for both jumbo and conventional loans. The banks have no choice. They need more mortgage business and the only way to do that is make it easier to obtain a mortgage.
You will never see the lending standards as easy as they were pre-2008 and that’s a good thing. But doing a complete 180 is not the answer either. It’s basically a supply and demand equation. The supply is down and the demand has to increase. The best way to do that is make it easier. It will not happen overnight but the signs are appearing. Time for the banks and mortgage companies to get back in the real world.