Only one-third of Americans have credit scores higher than 680; the rest fall somewhere below that magic number, according to Experian. A new report, though, raises a lot of questions as to why the housing and real estate markets are doing so well. Turns out, prime mortgages are being denied for 90% of all applicants. That’s huge – and while this is applicable only for prime mortgages – reserved for those with scores higher than 780, the fact that two-thirds of Americans have scores below 680 (which is what’s required for most mortgages) raises the question: who’s driving these improvements in the housing sector?
We’ve known for some time that lenders have been taking an extraordinarily cautious approach in this particular area of consumer finance and the mortgage standards are tightened. There’s no such thing as a decent rate for most, despite these self-congratulatory pats on the backs our nature’s politicians have taken to. The Federal Reserve just released the new report and the insight provided is interesting. Make no mistake, our credit scores are more important than ever before.
Credit Scores Shifted
Between 2007 and 2012, those with those with prime scores bought 30 percent fewer houses.
Originations are virtually nonexistent for borrowers with credit scores below 620,
said Elizabeth Duke, member of the Board of Governors for the Federal Reserve System. Not only that, but since 2007, the median scores needed for those impressive rates rose from 720 to the 780 magic number. For those who qualified for mortgages in the 10th percentile now need at least a 690 to qualify and that too is up from 640 in the same time period. Anything below 690, you’re pretty much wasting your time. Most lenders won’t even make an offer, much less waste their time speaking to any applicant who can’t hit that 690 score.
Before the mortgage crisis kicked in, loan officers were getting approvals with lenders when their clients had credit scores as low as 550 and often, they were getting the approvals with no money down. Those days are long gone. Not only must an applicant have at least the 690 score, often, they too are being declined for other reasons such as a spotty employment history, not being able to provide an ample down payment and other underwriting criteria a lender sets forth.
Government Backed Mortgages
There is one bright spot, though. For those who don’t qualify for those traditional mortgages can sometimes turn to the government – but they still must have the higher credit scores. These work, usually, when the scores are right, but the other factors aren’t, such as a break in employment. The Federal Housing Administration, the Department of VA Affairs or the Rural Housing Service can step in and tips the scales, but even then, there are no guarantees and the lower one’s credit scores, the greater the odds even these agencies will opt to not back a loan.
But here, too, loan originations appear to have contracted for borrowers with low credit scores,
Duke said. These days, for FHA originations, the median credit score on FHA purchase originations is 690. In 2007, the median was 625.
Politics of it All
Meanwhile, President Obama, on Saturday, encouraged lawmakers to back his nominee to oversee mortgage financiers Fannie Mae and Freddie Mac, Democratic Representative Mel Watt. While it may not appear politics would play too big of a role in the scoring and approval factors, anytime there’s this much uncertainty, it’s the consumers who will back off anyway. Obama insists Watt has the magic touch, though.
Mel’s represented the people of North Carolina in Congress for 20 years, and in that time, he helped lead efforts to put in place rules of the road that protect consumers from dishonest mortgage lenders and give responsible Americans the chance to own their own home,
Obama said on Saturday. Looks as though he forgot to mention the statistics that most can’t qualify for a mortgage anyway. Instead, he strongly urged Congress to do the right thing,
He’s the right person for the job, and that’s why Congress should do its job, and confirm him without delay,
Obama said.
If the Obama Administration is hoping for a smooth transition, it should have known long ago it never goes down like that. It’s expected he’ll undergo some tough questioning with confirmation not a sure thing. If it seems as though this batch of political leaders are reliving their college fraternity days, you’re not alone. It seems these days, to get into the political circles, one must undergo hazing while a group of others determine their worthiness. This is the kind of behavior that likely had something to do with Edward DeMarco stepping down from the lead role in the FHA after just two years.
Mortgage Scandals
The mortgage scandals, along with a growing number of folks who want both Fannie Mae and Freddie Mac to be disassembled, simply flies in the face of those insisting the housing market is on the mend. It can’t be both, after all. You may recall that both Fannie Mae and Freddie Mac were seized by the government in 2008 as mortgage losses continued to mount. Already, both have received $187.5 billion in taxpayer funds to stay afloat, while paying about $58 billion to the Treasury in dividends.
There are many factors that are going to ultimately shape what the mortgage industry looks like a year from now. Three of the most pressing ones at this time include those gnawing – and growing – concerns over European finances. They’ve helped keep core EU rates low and because of that, there has been some spillover effect in the US rates. The economy is still too weak and now, many say we’re at a crossroads of sorts when it comes to the so-called rising rate environment; will it be challenged or remains as it is today?
What are your thoughts? Do the contradictory factors concern you or do you think it will all balance out with time? Also, if you’ve tried to qualify for a mortgage in recent months, what was your experience during the process? Did your credit scores qualify? Share your stories with us. Be sure to like our Facebook page too so that you can join in the conversation there.