Credit is slowly starting to get easier in the mortgage market
Ellie Mae is a software provider that aggregates mortgage origination activity
Ellie Mae (ELLI) puts out a monthly Origination Insight Report that provides monthly data and analysis from a sample of closed loan applications that flow through its Encompass 360 Mortgage Management Software. In many ways, it’s similar to the way Automatic Data Processing (ADP) reports employment data in that it mines the data it receives from its clients who use its solutions. The Origination Insight report is based on a relatively robust sample—44% of all applications initiated on the system. Ellie Mae reports on the characteristics of loans that were approved or denied, along with data like credit scores, loan-to-value (LTV) data, and debt-to-income (DTI) ratios. Ellie Mae estimates that its software is used on 20% of all U.S. mortgage originations.
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Is credit beginning to thaw?
Average FICO scores are falling… barely. After plateauing at 750 for most of late summer and fall, average FICO scores for approved loans have fallen to 737, which is still a pretty stringent level. During the bubble years, credit was very lax, and average FICO scores were around 720 for 2006, 2006, and 2007. After the bubble burst, credit became very tight, and average FICOs increased to 757.
The Consumer Financial Protection Bureau (CFPB) had hoped that the new Qualified Mortgage (QM) rules would have eased credit conditions somewhat. The QM rule sets standards for new mortgages that codify the “ability to repay” rules. Exotic mortgages—like negative-amortizing (pick-a-pay) loans or high cost loans—can’t be qualified mortgages. The CFPB has set a debt-to-income ceiling of 43%. FICO scores aren’t part of the equation. In return, borrowers are unable to sue a lender if they end up defaulting. Credit is becoming easier to get. However, the question is whether that’s due to home price appreciation or the QM rule.
Implications for homebuilders
Homebuilders, like Lennar (LEN), Meritage (MTH), Ryland (RYL), Standard Pacific (SPF), and KB Home (KBH), rely on a functioning capital market to do business. Restricted credit not only hurts them in that some of their potential customers are unable to qualify for a loan, but their customers are also often move-up buyers who need to sell their starter homes. The first-time homebuyer has been squeezed by a difficult job market and an unforgiving credit market. Add to this the fact that the first-time homebuyer is lugging a tremendous amount of student loan debt. If first-time buyers can’t put up 20%, they’re more or less stuck with FHA loans to buy a house. This predicament for first-time homebuyers has helped drive the rental boom and the jump in multi-family construction.
As the job market improves, credit scores will recover and more people should be eligible for a mortgage. A number of homebuilders noted that a tight credit market remained a headwind, but that backlog and orders were strong. The West Coast–based builders especially noted strength. As credit conditions ease and consumer balance sheets improve, homebuilders can expect increased activity for the next few years.