Two Lending Changes and How They Could Shift the Mortgage Market

Summer is a time for new growth and changes, and the mortgage market this summer is not wanting of such developments. Two recent lending changes go into effect this month and could certainly help millions in qualifying for a home loan, but may also add risk to the market.

For starters, two major mortgage firms, Fannie Mae and Freddie Mac are increasing the amount of debt borrowers are allowed to have while still qualifying for a loan. Previously, both giants had permitted the debt-to-income ratio to be 45 percent of your pretax income, but they have chosen to raise that rate this summer to 50 percent.

This shift is designed to target those with higher levels of student loan debt, many of whom have not been able to qualify for a home loan since the uptick in underwriting rules after the recent financial crisis. Some believe this will merely add debt and enhance the chance of default for those who now qualify, while others say the risk is small since lenders consider many factors beyond debt-to-income ratios when underwriting a mortgage.

Altering the Mortgage Market

Another key change that will alter the market is the dropping of some tax liens and civil judgments by the nation’s three major credit rating agencies: Experian, TransUnion and Equifax. The “some” includes those liens and judgments that do not have complete information, meaning there is not a name, address and Social Security number or date of birth attached. Surprisingly, a large number of liens and judgments do not include this information, leading to numerous mistakes and misrepresentations.

Individuals with a tax lien or civil judgment attached to their profile are viewed as significantly more risky on the part of the lender, two to five times more risky actually. Almost 15 and a half million Americans have a lien or civil judgment against them, and with those removed, their credit rating could increase by as much as 20 points, according to FICO.

Once again, the market is divided in terms of who supports this shift and who views it as a major risk. Some believe this will open up the market, allowing more individuals to qualify for loans and therefore look to buy. Others see this as merely the extension of credit to those who may not reasonably qualify or who cannot afford the extension.

Many of these changes are due to a decrease in the number of borrowers; thus, lenders are looking for ways to open up the market and allow more borrowers in. While it may look like lenders are biting off more risk than they can chew, they will undoubtedly tighten credit elsewhere to balance their risk. So, although the information used to evaluate credit and overall risk is shifting, lenders appetites for risk have remained the same, which means borrowers will still need an overall favorable risk profile if they hope to purchase a home.