Green Shoots of Credit?

In recent weeks, several originators have announced new programs or initiatives aimed at expanding credit to borrowers with lower FICO scores.  These programs entail significant compensating factors or are geared toward niche markets.  Most indicators have not shown an improvement of access for lower FICO borrowers, but one indicator may signal a recent thaw in lending at the lower credit ranges.

Over the last two months several new programs or initiatives have emerged aimed at lower-credit borrowers.  These initiatives include:

• Wells Fargo reduced minimum FICO scores on GSE products from 660 to 620 and FHA products from 640 to 600
• BNP Paribus announced that it was “making exceptions to guidelines” on some loans
• TD Bank lowered down payment from 5% to 3%, raised DTI requirements and eliminated mortgage insurance on its “Right Step” product

However, the gates have not been thrown open and this is certainly not a return to underwriting by fogging a mirror.  Wells Fargo plans to use compensating factors and utilize an “explanation of credit history events” and will require a demonstration of “stability of employment”. [1]  BNP Paribus will make exceptions “for borrowers with credit dings caused by recession that don’t accurately reflect their financial situations”.  TD Banks’ Right Step offering requires a 660 FICO score or higher, a 41% back-end debt to income ratio and requires the buyer to take a financial education program.[2]  This last program bears a strong resemblance to the FHA’s new HAWK program, but with much tighter requirements.  Finally, Chase recently announced that it will be making changes to facilitate lending at the lower FICO spectrum, but has yet to announce details.

These programs may be too new to have shown up in market indicators as of yet.  For instance, lenders’ responses in the Senior Loan Officers’ Survey for the first quarter of 2014 indicate a sustained reluctance to originate subprime mortgages as depicted below.

One data source does suggest that there has been a modest thaw in lending at the lower credit spectrum in recent months.  Since 2012, there has been a steady decline in the average FICO score on accepted conventional applications and accepted FHA applications reported by Ellie Mae as borrowers shifted from FHA financing to conventional financing.  This trend was blogged about earlier[3] and reflects both the re-emergence of private mortgage insurers in early 2012 as well as a sustained increase in fees at the FHA which were recently made permanent for the life of the loans.

However, in March the average FICO score on a rejected application for FHA financing fell nearly 7 basis points to 660 and remained low at 664 in April.  This decline is the first significant decline in nearly two years and is an expansion of the spread between the average FICOs of accepted and rejected applications for FHA financing; or an expansion of the outer portion of the credit box.  This trend could also represent a reduced rejection rate for applicants with higher FICOs and not a true improvement for lower FICO applications, though.  It will take time to develop a better picture of the credit box around the FHA program.  However, a rejected FICO score of 664 is still nearly 10 points higher than the average accepted FICO in 2011.

It’s too early to tell whether this trend is in fact a modest thaw and whether it will extend, but originators appear to be turning their attention to this portion of the market.  This trend represents green shoots, but not a full recovery of traditional, healthy lending.