Credit Scores Rising, LTVs Dropping on New Mortgages: Report
04/06/2012 By: Carrie Bay
Mortgage lenders remain cautious in terms of credit quality, down payments, and valuations, as evidenced by the findings outlined in the new Origination Insight Report generated by Ellie Mae.
The company found that the average credit score for loans approved by lenders and closed is steadily rising, while acceptable loan-to-value (LTV) ratios are declining.
Ellie Mae’s report series tracks the current lending environment for refinance and purchase mortgages and provides metrics on the kinds of loans getting done and on the challenges consumers and lenders are facing. The company intends to issue the report monthly.
Ellie Mae’s inaugural Origination Insight Report discusses changes in mortgage lending activity over the month of February 2012, as compared to the company’s historical data from the prior six months.
The average credit score on loans that closed was 750 in February, up from 740 six months before. Meanwhile, the average loan-to-value (LTV) ratio was 76 percent, a decrease of 3 percent from August 2011.
The average FICO score for borrowers who were denied a loan in February was 699, according to Ellie Mae’s analysis. The average LTV of denials was 83 percent.
“If you look at the full report on our website, you’ll see the impact of the higher underwriting requirements for refinance that were in place in February,” said Jonathan Corr, COO for Ellie Mae.
“Last month, if your FICO score was below 720 or you had a down payment or equity of less than 25 percent, there
was a good chance that your refinance application for a conventional loan was denied or you were offered a significantly less attractive interest rate, Corr explained.
He also noted that borrowers denied a mortgage refinancing during the month had a front-end debt-to-income (DTI) ratio – which is calculated as total housing payment divided by total gross income – of 27 percent and a back-end DTI – measured as all monthly debt, including the mortgage, divided by gross income – of 43 percent.
Those borrowers that were approved for a loan and closed in February demonstrated a front-end/back-end DTI of 23/34.
Ellie Mae also offered up a snapshot of the types of mortgage loans closed in February. Sixty-seven percent were refinances and 33 percent were for the purchase of a home.
The Federal Housing Administration (FHA) garnered 25 percent of the new market share in February, while conventional loans made up 67 percent of the month’s closings.
The timeline from application to closing for the average loan was 44 days in February and 43 for a refinance, up 10 percent and 16 percent, respectively, over where the industry was six months ago. Corr says these timeframes track with the increases in demand seen at the end of 2011.
To get a meaningful view of lender “pull-through,” Ellie Mae reviewed loan applications initiated within the previous 90 days to calculate a closing rate and found that nearly 48 percent of all applications closed. There was a higher percentage of purchase mortgages closing (60%) than refinances (42%).
In 2011, the total volume of mortgages that ran through Ellie Mae’s Encompass360 mortgage management software was approximately two million loan applications, or 20 percent of all U.S. mortgage originations. The company’s Origination Insight Report mines its data from a sampling of approximately 33 percent of all applications initiated on the Encompass origination platform.
Given the size of this sample and Ellie Mae’s market share, the company believes the Origination Insight Report is “a strong proxy of the underwriting standards that are being employed by lenders across the country.”