American financial institutions are beginning to lower lending standards pursuant to finding the proverbial sweet spot following a haphazard period of home lending that had resulted in draconian lending policies.
American financial institutions are beginning to lower lending standards pursuant to finding the proverbial sweet spot following a haphazard period of home lending that had resulted in draconian lending policies. The strict nature of these policies had in turn served as a headwind to the country’s housing recovery.
Wells Fargo & Co. (NYSE: WFC), which is currently the United States’ leading home lender, reduced the minimum FICO score required for borrowers of Fannie Mae and Freddie Mac-guaranteed loans from 660 to 620. This came on the heels of other institutions lowering their credit score requirements or other thresholds for potential homeowners; for example, Canadian institution Toronto-Dominion Bank reduced down payments to 3 percent, with no auxiliary requirements for mortgage insurance on some products.
This is in contrast to how banks reacted to the temerarious nature of home lending ahead of the worldwide economic crisis, as stricter borrowing requirements had precluded about 1.2 million loans from being made two years ago. Many lenders had taken advantage of the refinancing boom up until the summer of last year, which was when talk of a possible tapering of Federal Reserve stimulus had caused interest rates to skyrocket. With refinancing statistics dropping in the aftermath of higher mortgage rates, mortgage lenders had cut thousands of jobs, with the biggest number of cuts coming from the country’s largest financial institutions.
These days, however, it would now appear that lenders are removing those obstacles and hoping to satiate the housing market by drawing in more customers with an easing of restrictions. “We threw the baby out with the bathwater because we had to,” quipped Western Bancorp Chief Executive Richard (Rick) Soukoulis. “From there, you start to inch back. If you keep selling only what isn’t selling, you’re just dead.”
Recent statistics back up the axiom that credit standards are looser than they were in the immediate post-recession years. According to the Mortgage Bankers Association, credit standards were at their most lenient in a span of more than two years in the month of March. The MBA’s analytics showed that its credit standards measure increased from 100 to 114, with higher scores indicating looser standards. However, it is believed that the index would have had readings of about 800 or thereabouts in 2007, which means that credit was significantly easier to obtain in the run-up to the global credit crunch.
Wells Fargo may be the latest leading financial institution to announce a loosening of standards, but it is far from being the only one that is benefiting from additional transparency in communication with Fannie Mae and Freddie Mac.
According to Wells Fargo head of production Franklin Codel, the bank now has “more confidence” that it would have done its job properly and the loans would not get repurchased, even if loans would go into default. Borrowers with lower credit scores would need to furnish certain documents and prove that they are deserving of homeownership, but Wells Fargo said that it will also seek “compensating factors” in hopes of closing the loan. These factors may include, but may not be limited to a justification of a certain credit history event, and an analysis of employment stability and/or the strength of a consumer’s income.