Signs of how strict lending has become

Barely one in five have FICO scores that qualify them for home loans

September 28, 2012 10:30AM

By Kenneth R. Harney

With 30-year mortgage rates hitting new lows and recent borrowers’ payment performance the best by far in decades, you’d think that banks and other lenders might be loosening up on their hyper-strict underwriting standards. But new national data from inside the industry suggest this is not happening. In fact, in some key areas, standards appear to be tightening even further, and the time needed to close a loan is getting longer.

The average FICO credit score on all new loans closed in August was 750, fully nine points higher than it was one year earlier, according to Ellie Mae, Inc., a Pleasanton, Calif.-based mortgage technology firm whose software is used by many lenders. The survey sample represents approximately one-fifth of all new loans – roughly 2 million mortgages.

At Fannie Mae and Freddie Mac, the dominant players in the conventional mortgage market, the average FICO score was even higher. For refinancings in August, the average approved borrower had a 769 FICO score, up six points from August 2011. The average score for borrowers purchasing homes was 763, one point higher than the year before.

FICO scores are used by virtually all mortgage lenders to gauge the credit risk posed by a borrower. Scores range from 300 to 850, with low scores representing higher probability of default, high scores indicating low risk. Fair Isaac Co., developer of the FICO scoring model, says 78.5 percent of all consumers currently have scores between 300 and 749. Barely one in five, in other words, scores high enough to meet today’s FICO score averages at Fannie and Freddie.

Other signs of how strict lenders’ standards have become:

. The average purchaser of a home using a Fannie-Freddie loan made a down payment of 21 percent in August and had a squeaky-clean debt-to-income ratio – with total monthly debt payments, including the mortgage – amounting to just 33 percent of income. Refinancers had an average equity stake in their houses of 30 percent.

. People who were rejected for Fannie-Freddie mortgages also had seemingly solid credit profiles by historical standards. The typical buyer whose application was declined had a 734 FICO score – up two points from a year before – and was prepared to put down 19 percent.

. Federal Housing Administration (FHA) borrowers’ credit profiles were also impressive, especially in view of that agency’s statutory mission to serve consumers with modest incomes, low down payments and less than perfect credit histories. In August, according to Ellie Mae’s survey, the average FICO score for FHA refinancers was 717, up 11 points from the year earlier. FHA home purchasers had average scores of 700 – four points below what they were 12 months ago – but still far beyond historical norms. FHA officially accepts FICOs as low as 500 and requires 10 percent down payments for borrowers below 580 but does little business at these score levels.

. In addition to – or maybe because of – the tougher standards, the mortgage process itself appears to be slowing down. The average time from application to closing for all loans during the time cycle in the Ellie Mae survey was 49 days, nine days longer than the previous August. For refinancings, the average processing time was 51 days, up from 37 days a year earlier.

What’s going on here? Given the Federal Reserve’s repeated interventions to lower the cost of money to banks, why are they keeping their credit requirements so high? Are there any prospects for relief for prospective buyers who simply don’t have 20 percent or 30 percent to put down and don’t have elite-bracket FICO scores?

Doug Duncan, the chief economist for Fannie Mae and former chief economist for the Mortgage Bankers Association, has a unique perspective on all this. He readily acknowledges that big banks – and Fannie and Freddie themselves – are seeing their highest-quality “books of business” in decades, maybe ever, thanks in large part to their strict credit standards and rigorous documentation rules.

He believes, however, that the underwriting cycle could start to loosen up as banks begin to pare down their post-housing bust pricing add-ons for borrowers, their fears of costly “buy backs” of existing loans recede, and long-awaited rules on mortgage lending are unveiled by the federal government.

That’s somewhere on the horizon. But in the meantime, don’t look for any dramatic relaxations. To get a mortgage, you’ll generally need high scores, big down payments -except for FHA, which accepts 3.5 percent down – plenty of time and reams of documentation

FHA relaxes condo-certification rules

September 21, 2012 11:30AM

By Kenneth R. Harney

New guidelines make it easier for building tenants to qualify for FHA-backed loans

Here’s some encouraging news for condominium unit owners, sellers and buyers: The biggest source of funding for low down payment condo mortgages, the Federal Housing Administration, has revamped controversial rules that caused thousands of buildings across the country to lose their eligibility for FHA financing. The revised guidelines, which were issued Sept. 13 and took effect immediately, should make it easier for large numbers of condo associations to seek certification by FHA.

The certification process is intended to provide FHA, a government-run mortgage insurance agency, with key information about a condominium development’s legal, physical and financial status. Without approval of an entire project – whether a small garden apartment development in the suburbs or a massive high-rise in the center city – no individual unit can be financed or refinanced with an FHA mortgage.

The agency’s previous rules were criticized as heavy-handed, costly and not in touch with the economic realities of condominiums in some parts of the country. For example, the rules prohibited FHA insurance of units in buildings where more than 25 percent of the total floor space was used for commercial or nonresidential purposes. Yet many condominiums in urban areas have lower floors devoted to retail stores and offices that generate revenues that help support the entire project. Many of those buildings suddenly found themselves ineligible for FHA financing for residents. The revised rules allow exceptions up to 35 percent commercial use, and provide for additional case by case exceptions to 50 percent or higher.

As a direct result of the previous FHA rules, just 2,100 of the estimated 25,000 condominium projects nationwide that were eligible for unit financing were recertified by late last year, according to the agency. Insurance volume also has plummeted. FHA estimated that it would insure 110,000 condo unit loans during fiscal 2012, which ends this month. But by July, it had only insured 35,433 units.

Though the previous rules focused on entire buildings, individual unit owners seeking to sell often have taken the brunt. Last year, one townhouse owner in Calabasas, Calif., Ryan O’Quinn, described his experience with his community’s failure to gain FHA certification as “a nightmare.” He lost four signed sales offers and had to cut the asking price on his condo by $81,000 because most buyers wanted to use FHA loans. Andrew Fortin, vice president of government affairs for Associa, a condo and homeowner association management firm based in Dallas, said he saw condos last week in the Tampa, Fla., area that could no longer be financed with FHA mortgages and are now selling for $15,000, all-cash.

The Community Associations Institute, the condo industry’s largest trade group, welcomed the relaxation of the FHA rules, predicting that “this will spark home sales and help tens of thousands of condominium communities begin to recover from the housing slump.”

One of the most significant changes FHA made involves personal legal liability for condo association boards and officers. The previous rules required officers to attest that they have “no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit” to become delinquent, no knowledge of “dissatisfaction among unit owners about the operation of the project or owners association” or “disputes concerning unit owners.” The penalty for officers who “knowingly” and “willfully” submitted information to FHA that was found to be false: fines of up to $1 million and 30 years in prison.

Not surprisingly, many condo board officers – who generally are volunteers – declined to take on what they interpreted as lifetime legal responsibility for such details as whether the condominium fully complied with state and local environmental and real estate requirements. Though FHA insisted the associations were overreacting, the new certifications contain much less scary language. The penalties for intentional frauds against the government remain the same, however.

Among other key rule changes:

. Greater flexibility on investor ownership. In existing projects, one or more investors are now allowed to own up to 50 percent of the total units provided at least half of the units are owner-occupied. The previous rule required that no more than 10 percent of units could be owned by a single investor.

. The previous treatment of unpaid condo association dues was raised to 60 days from 30 days. Under the revised rule, condo communities where no more than 15 percent of unit owners are 60 days late on payment of dues can be approved for FHA loans.

. Clarification of certain insurance requirements that many communities found burdensome.

Banks Re-Establish Credit Lines with Home Builders

By Allison Bisbey

SEP 17, 2012 10:29am ET

Home builders are buying up more land in anticipation of a stronger housing market, leading them to take on more debt.

While the biggest builders are obtaining most of their financing from the public debt and equity markets, where enthusiasm about a housing market recovery is running high, they are also re-establishing revolving lines of credit with banks, in many cases for the first time in several years.

On Sept. 7, D.R. Horton said it had entered into a five-year, $125 million senior unsecured revolving credit facility with Royal Bank of Scotland. Initially, RBS is providing the entire commitment, but the facility has an uncommitted $375 million accordion feature that could increase it to $500 million, subject to the availability of additional bank commitments, among other conditions. The bank had terminated its previous facility in 2009.

D.R. Horton is rated BB- by Standard & Poor’s, Ba2 by Moody’s Investors Service and BB by Fitch Ratings.

“We are excited about the profitable growth opportunities we are seeing across our home building markets, and we believe this is an opportune time to add a revolving credit facility to our capital structure,” Donald R. Horton, the company’s chairman, said in a press release.

In July, Beazer Homes negotiated a commitment letter with four financial institutions for a $150 million secured revolving credit agreement, replacing a much smaller, $22 million facility. Beazer is rated B- by S&P, Caa2 by Moody’s and B- by Fitch.

And Lennar entered a new, unsecured revolving credit facility, effective May 2, 2012. The $410 million facility, which matures May 2, 2015, has an accordion feature under which it can increase to a maximum of $525 million, subject to certain conditions and the availability of additional bank commitments.

Lennar is rated B+ by S&P, B1 by Moody’s and BB+ by Fitch.

Builders are going to need the financial flexibility, especially if they accelerate their spending on land and development. Fitch anticipates that such spending will rise moderately to sharply this year versus 2011, meaning most builders will burn more cash than they generate from home sales. As a result the ratings agency expects at least a few more public builders will re-establish revolvers.

A majority of the public builders that Fitch tracks negotiated amendments to revolving credit agreements late in 2007, 2008, and 2009, and many builders then terminated their facilities during the past two and a half years.

At the time, many builders didn’t need revolvers because they were generating more cash than they were spending on new land and didn’t want to pay the fees for facilities they weren’t using. For example, D.R. Horton has used internally generated funds to repay more than $4 billion in debt since the downturn, according to Moody’s. However, the ratings agency expects the home builder’s cash flow to be negative this year as it replenishes and adds to its land position.

Another possible motivation for terminating revolvers, according to Robert Rulla, a director at Fitch, is that home builders wanted to avoid covenant restrictions associated with revolvers. Many ran afoul of these covenants during the downturn when they took writedowns on options to buy land.

In some cases, builders substituted much smaller lines that were solely in place to back letters of credit, which builders need in any kind of operating environment to issue performance bonds or satisfy option deposits. (Performance bonds are guarantees provided to a community that funds will be available for the roads, utilities and other infrastructure needed to support new homes.) Such letters of credit lines were generally collateralized with cash, while many large public builders are obtaining revolvers that are unsecured.

The biggest builders also have access to public debt and equity markets, where enthusiasm for a housing recovery is running high. On Sept. 11, D.R. Horton priced $350 million of 4.375% senior unsecured notes due in 2022, its second offering this year. On Sept. 5, Toll Brothers priced a private offering of $250 million aggregate principal amount of 0.50% exchangeable senior notes due 2032. Toll Brothers is rated BB+ by S&P, Ba1 by Moody’s and BBB- by Fitch.

And in July, Beazer completed public offerings of its common stock, tangible equity units and a private placement of $300 million of 6.625% senior secured notes, netting $466 million, according to Fitch. (It also called for redemption of all of its $250 million 12% senior secured notes due 2017 and repaid $20 million under its outstanding cash-secured term loan.)

Both stock and bond markets have responded positively to upbeat readings on real estate. On Aug. 23 the Federal Housing Finance Agency reported the biggest quarterly jump in housing prices in more than six years, going back to the fourth quarter of 2005. It said U.S. house prices rose by 1.8% on a seasonally adjusted basis in the second quarter of 2012 compared with the first quarter and by 3.0% compared with the same quarter last year.

Confirming the trend, on Aug. 28 the S&P/Case-Shiller Home Price Index showed that the national composite was up 1.2% in the second quarter of 2012 over a year earlier and up 6.9% over the previous quarter. In a separate report on Aug. 23, the Department of Commerce said seasonally adjusted single-family new home sales for July were 372,000, a 3.6% increase over June and a 25.3% increase over July 2011.

Home builders are reaping the benefit; in a report published last week, Moody’s said three market-implied ratings it tracks have progressed significantly for the average home builder compared with the same time last year. Compared with the B1 level of a year ago, the average CDS-implied rating for a peer group of U.S. home builders is now two notches higher at Ba2.

The five-year median CDS spread for this peer group plunged from around 598 bps in September 2011 to 339 bps at present, or 43%, and the CDS-spread for every company in the peer group fell. By contrast the average CDS-spreads for U.S. financials, U.S. industrials, and the median B1-rated companies remained mostly flat.

Standard Pacific performed the best in the CDS market last year, its CDS-implied rating improving by four notches, from B3 to Ba2. The other nine companies’ CDS-implied ratings rose between one and three notches.

Smaller, typically private home builders don’t have it so good. Fitch expects they will be restrained in their construction activity by their banks’ subdued lending, as was the case in 2009 and 2010. “Much of what a private builder tends to build is what we call speculative homes, construction begun before an order is taken,” said Bob Curran, a managing director at Fitch. “By its nature, it’s somewhat risky.”

Housing reform AWOL on the trail

By Ken Harney

09/14/2012

WASHINGTON – Call it the political elephant in the room: 1.2 million families across the country are now at some stage of foreclosure, 3.8 million homeowners have been foreclosed upon since September 2008, 11.4 million are underwater on their mortgages, $6.5 trillion in home equity has been lost by owners since 2005, home building and sales are intimately linked with job creation, yet the subject of housing policy was virtually a no-show in either the Democratic or Republican conventions or in the party platforms.

Given the huge impacts that the housing and mortgage crashes have had on millions of voters and workers, you would think housing would have been high on both parties’ priority lists. They’d say: OK, here’s how we’re going turn this crucially important situation around – getting builders building again to pre-boom historical levels, helping out the good folks who paid their loans on time even when underwater, plus making sure banks make loans available to credit-worthy buyers who want a mortgage rather than penalizing them for the banks’ own past mistakes.

But Mitt Romney didn’t mention housing policy at all in his speech to the Tampa convention. President Obama barely touched it, saying that “I’ve shared the pain of families who’ve lost their homes.” The Republican platform panned the Obama administration’s response to the housing crisis as having “done little to improve, and much to worsen, the situation.” The GOP solution: privatize pretty much the whole mortgage finance system, kill Fannie Mae and Freddie Mac – which currently fund about two-thirds of all new home lending – and cut the role of the Federal Housing Administration, which is the primary source of mortgage financing for first-time and minority purchasers who have moderate incomes but less than 20 percent down-payment cash.

The Democratic platform claimed credit for assisting 5 million struggling homeowners “restructure their loans to help them stay in their homes” – a total far beyond most analysts’ estimates for the Home Affordable Modification Program and related federal efforts. The left-leaning Firedoglake blog called the 5 million claim “dishonest nonsense on housing,” and added that the platform’s numbers failed to account for “the (mortgage) modifications that went into redefault or the trial modifications that were canceled and squeezed the borrower by demanding the difference between the original payment and the trial modification immediately.” Last month, an independent research study by federal and academic economists reported that rather than the 3 million to 4 million families originally projected by the White House to be assisted with modifications by HAMP, the actual number will be barely one-third that target.

The Democratic “platform plank on this issue is so disingenuous,” wrote David Dayen on Firedoglake, that “it makes Paul Ryan’s convention speech look scrupulously honest.” In The Nation, another publication on the political left, commentator George Zornick ridiculed the Democratic platform’s boasting of a “crackdown” on the fraudulent lenders who helped create the subprime crisis, noting that “no high-ranking Wall Street officials or firms have been held responsible for the subprime catastrophe” that they facilitated by buying and securitizing poorly underwritten, toxic mortgages.

The Republican platform, meanwhile, blamed the whole subprime mess and housing collapse on Fannie Mae and Freddie Mac, even though private investment banks such as Lehman Brothers and Bear Stearns played far larger roles in the securitization money machine that fueled the subprime mania. The roles of Wall Street and the big banks get no direct criticism by the Republicans, even though the private secondary market they control would be the foundation for any new system of mortgage finance under a Romney administration.

Even on a subject that has broad popular support among voters – continuing tax benefits for homeownership, particularly the mortgage-interest deduction – the parties waffled. The Democratic platform avoids the issue entirely; Obama has proposed reducing the mortgage write-off for owners with incomes above $250,000. The Republican platform drafters initially rejected any pledge of support but later relented with language agreeing to continue the deduction if Congress fails to enact comprehensive tax reforms.

So why has housing, which traditionally leads the economy out of recessions, suddenly become a political orphan this election? Could it be that both parties feel vulnerable about any serious discussion of their own roles in the crash – regulators blind to widespread irresponsible lending during the Bush years – and the painfully inadequate response to the foreclosure explosion during Obama’s? Or the possibility that neither side has politically viable solutions for fixing the system?

Try both.

Regulatory Bill Sparks Alarm Among Reform Advocates

By Kevin Wack

SEP 12, 2012 4:38pm ET

WASHINGTON – Supporters of financial reform, caught off balance by an end-of-the-year push in the Senate to subject a wide range of new regulations to greater scrutiny, are reacting frantically to what they see as a threat to undermine the Dodd-Frank Act.

The source of their anxiety is legislation introduced early last month by Sen. Rob Portman, R-Ohio. The bill has a chance to move quickly to a vote on the Senate floor, although that possibility became more remote Wednesday when a potential committee vote on the measure was delayed until Nov. 15.

The legislation has the support of Democratic Sen. Mark Warner, and its opponents fear that other Senate Democrats will join him.

“The bill has really been one of these D.C., under-the-radar-screen efforts to really gut some stuff that if it was brought to the surface would never pass muster,” said one Democratic Senate aide who expressed alarm. “People are not paying attention. It’s going to catch people off guard.”

The bill would require independent federal agencies – including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Commodity Futures Trading Commission – to conduct more rigorous analyses of the regulations they propose.

The Federal Reserve Board would get an exemption from the bill’s requirements for its monetary policy duties, but there is some confusion on Capitol Hill about how far the central bank’s exemption would extend.

Agencies contacted for this article declined to comment on the record. But the FDIC, the Fed, the CFPB and the SEC have all expressed concerns to lawmakers about the legislation, according to a Senate source.

Spokespeople for Portman, Warner and Republican Sen. Susan Collins, another co-sponsor of the legislation, did not return calls seeking comment. But industry supporters of the bill argue that their foes are exaggerating its potential impact.

While the measure would require independent agencies to compare the costs and benefits of a proposed regulation, and then to submit that analysis to the executive branch for review, nothing would stop the agencies from moving forward with a regulation even if the executive branch found the analysis lacking, the legislation’s supporters say.

“We think that as we try to implement the regulations, the cost-benefit analysis is a crucial piece of the overall analysis,” said Scott Talbott, senior vice president of public policy at the Financial Services Roundtable, which supports the bill. “The goal here is to implement the new policies under Dodd-Frank, but we have to be careful not to undermine the economic recovery.”

James Ballentine, executive vice president of congressional relations at the American Bankers Association, said his organization welcomes any effort that would allow a full analysis of the new regulations the banking industry is facing.

“And to the extent that this bill or any other bill would allow a fair analysis of, or review of these regulations, we would certainly appreciate it,” he said.

Portman, the first-term Ohio senator who is sponsoring the legislation, was director of the White House Office of Management and Budget during President George W. Bush’s administration. His bill would give new authority to the Office of Information and Regulatory Affairs, which is located inside OMB.

Portman was reportedly a candidate to be Republican presidential candidate Mitt Romney’s running mate, and his proposal bears some similarities to what Romney has promised to do in the regulatory sphere if he’s elected.

The legislation would allow the president to require independent agencies to take up to 13 additional steps before issuing a new rule. Among those potential requirements is a cost-benefit analysis, which is already required of executive branch agencies such as the Environmental Protection Agency.

Later on, regulatory officials at the White House would issue a written determination of whether the independent agencies had fully complied with the required analysis.

A negative assessment would not technically tie the agency’s hands. But financial reform advocates argue that, practically speaking, poor marks would prevent agencies from moving forward with new regulations, because the administration’s ruling would be powerful ammunition in industry lawsuits against the new regulations.

“The litigation that’s going to be created from this act is almost unbelievable,” said Dennis Kelleher, president of Better Markets, a non-profit group that advocates for financial reform. “Now if you’re the industry, that’s great.”

“They’re called independent agencies because they’re independent of the executive branch. What this bill would do is actually subordinate them to the executive branch,” Kelleher added. “This really is a historic, breathtaking reversal of the way government has protected people in this country for the last 80 years.”

The bill, which has not been the subject of a Senate hearing, is currently under consideration by the Homeland Security and Governmental Affairs Committee, chaired by Connecticut Sen. Joseph Lieberman, an independent who caucuses with the Democrats.

The committee was considering holding a vote on the measure in September, but it informed members Wednesday that its meeting will be delayed until after the elections, and that no decision has been made on whether the bill will be among those considered at that time.

Delaying the vote until after Election Day could make it easier for vulnerable Democrats such as Sens. Jon Tester and Claire McCaskill, both of whom are members of the committee, to vote no.

There is still a possibility that the legislation could be attached to another bill during the lame-duck congressional session that will follow the Nov. 6 elections. At that stage, it would need the support of at least 13 Democrats to reach the Senate’s routine 60-vote hurdle.

An important player in the Senate deliberations will be Warner, the Virginia Democrat whose support for the bill has increased its chances of becoming law. He has long been interested in subjecting the costs of new regulations to greater scrutiny, proposing in 2010 that each new regulation be met with the repeal of an existing one.

The Obama administration has not weighed in publicly on the bill, though last year it threatened a veto of a related House measure that had some Democratic support.

In the Senate, opposition to the legislation may also emerge from committees that would see their authority over independent agencies diminished. Agencies such as the Nuclear Regulatory Commission and the Consumer Product Safety Commission would be affected by the bill, in addition to the financial regulators.

Senate Banking Committee Chairman Tim Johnson, D-S.D., expressed apprehension about the legislation’s potential impact on Dodd-Frank.

“Chairman Johnson doesn’t want cost-benefit analysis to be a means to watering down Wall Street Reform,” said Sean Oblack, a Johnson spokesman.