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Analysis Shows That Lenders Overly Restrict Credit

frozen-creditMany mortgage lenders are still applying credit overlays that are stricter than what Freddie Mac, Fannie Mae, or Ginnie Mae require.

Recent survey data from Fannie Mae's Economic & Strategic Research group found that approximately 40 percent of lenders who deliver loans to the GSEs or Ginnie Mae reported applying credit overlays that are more stringent than what the GSEs or Ginnie Mae require.

The research group surveyed senior mortgage executives in May 2015 through its quarterly Mortgage Lender Sentiment Survey to examine the attitudes of lenders in relation to credit overlays. Credit overlays refer to stricter mortgage approval standards that lenders place above the guidelines set by investors (such as the GSEs), are a potential and often cited factor impacting consumers’ access to mortgage credit.

In an analysis released on Tuesday of this survey, Li-Ning Huang senior manager of Economic & Strategic Research delved into how lenders are limiting credit to borrowers unnecessarily.

Huang notes that an improving economy since the recession has caused mortgage credit standards to loosen gradually. However, homeownership rates continue to decline and are at the lowest level since 1990.

"This situation has prompted policymakers, regulators, and industry participants to examine the appropriateness of credit standards and the availability of mortgage credit for American consumers," Huang said. "Better understanding lenders’ attitudes about the lending parameters they employ may shed additional light on factors that could make it more viable for lenders to do business within the full credit boxes of the GSEs."

According to survey results, about 40 percent of lenders who deliver loans to the GSEs or Ginnie Mae reported they apply more stringent credit overlays than what the GSEs or Ginnie Mae require. Additionally, 60 percent of lenders who originate or acquire loans through wholesale channels said they apply credit overlays through these channels.

Fannie Mae also reported that 64 percent of lenders who deliver loans to the GSEs or Ginnie Mae said that credit overlays are applied on just 20 percent or less of their loan originations.

The most common type of overlay applied, as cited by lenders, is higher credit score (47 percent), followed by additional documentation requirements (21 percent), reflecting the impact of the Ability-to-Repay and Qualified Mortgage rule that took effect on January 10, 2014.

Lenders cite high Debt-to-Income (DTI) ratios, low credit scores, and documentation quality as the most common reasons for purchase loan application denials. Similarly, for refinance applications, lenders cite high DTI ratios, low credit scores, and insufficient collateral as the most common reasons for application denials.

"Overall, the survey results suggest that lenders apply credit overlays on a limited basis, but the extent to which they apply credit overlays varies by channel, the author said. "Correspondent lenders and mortgage brokers are more likely to apply credit overlays than are retail lenders who deliver loans directly to the GSEs or Ginnie Mae."

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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