For agents, a pair of changes in the mortgage market just might shift the dynamics in your local market enough to have a positive impact on your business in the coming months. These changes could help millions more borrowers qualify for a home loan, but they may also increase the risk to the mortgage market.
According to a CNBC report, the county’s three leading credit rating agencies – Equifax, TransUnion and Experian – are dropping tax liens and civil judgments from some consumers’ profiles if the information isn’t complete. According to the report, the information has to include the individual’s name address and either their Social Security number or date of birth. Some that don’t include this have led to errors. Of the 220 million-plus Americans with a credit profile, it is estimated that about 7 percent have liens or civil judgments against them.
Thomas Brown, senior vice president of financial services at LexisNexis, is worried this will add increased risk to the mortgage system. He said it is “a significant impact for still a very large number of people.”
“If you look at someone that has a tax lien or a civil judgment, they can be anywhere from two to more than five times more risky just because of the presence of that information. That’s very, very significant.”
In another shift, Fannie Mae and Freddie Mac are now permitting borrowers to have higher levels of debt and still qualify for a home loan. The two GSEs are raising their debt-to-income ratio limit to 50 percent of pretax income from 45 percent. This change is developed to help potential buyers with high levels of student loan debt, which could mean that buyers will be saddled with even more debt. This could saddle them with more debt, increasing the risk of default. Doug Duncan, Fannie Mae’s chief economist, said that risk in the market now is unnecessarily low.
“In this case, we’re changing the underwriting criteria, and we think the additional increment of risk for making that change is very small. Given how pristine credit has been post-crisis, we don’t feel that is an unreasonable risk to take.”
The changes are coming as lenders also are competing in a pool of fewer buyers, amid rising prices and short supply. Increases in interest rates have impacted the number of mortgage refinances. High home prices and short supply are leading to fewer buyers. Duncan noted in the study that loosening the restrictions on credit standards might be a result of increased pressure to compete for declining mortgage volume.
“For the third consecutive quarter, the share of lenders expecting a decrease in profit margin over the next three months exceeded the share with a positive profit margin outlook. For the former, the percentage citing competition from other lenders as a reason for their negative outlook reached a survey high.”
However, Fannie Mae, in announcing the changes, noted its position on risk is unchanged. This could signal changes in other aspects of a borrower’s risk profile. LexisNexis’ Brown noted that the perception is this is a windfall for consumers who now will just be able to get more credit.
“Well, the reality is the risk in the marketplace has not changed. The information that’s used to assess risk is what’s changing, and so for banks and others extending credit, if they want to maintain the same loss rates, they have to tighten credit somewhere else. It’s just pure math.”