He said some lenders are dumbing down on FICO scores as well, soliciting applications with scores in the mid-500s in combination with relatively skimpy down payments and “varying degrees of risk layering.” FICO scores, which are used in most home-loan financings, run from 300 to 850, with the highest risks of future default associated with low scores. Scores below 620 indicate noteworthy credit issues in the borrower’s past. Average FICOs for home-purchase loans acquired by Fannie and Freddie hover close to 750.
Within the past 18 months, Meussner said he has seen a sizable jump in loan offerings that contain layers of risk piled on top of one another, plus “increasingly ‘creative’ documentation standards.” He emailed me one example of how documentation rules — the bedrock of sound underwriting practices in the post-crash era — can be compromised. In an online lenders’ chatroom, a sales representative of a wholesale mortgage company said his firm would approve a loan to borrowers who can’t or won’t document their earnings — essentially a “stated income” loan harking back to the Wild West days of 2005 and 2006 when they were commonplace but later led to massive defaults and foreclosures. “Stated income” back then meant: You tell the lender what you earn and the lender accepts it, no verification needed.
“Typically,” said Meussner, “this is how the trouble begins.”
Other lenders see things starkly differently. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says documentation is still a big deal for most lenders reaching out to home buyers who are marginal credit risks. “They continue to scrutinize applicants and their documents in unbelievable detail,” said Skeens.
That may be why they’re generally not seeing a lot of defaults. Angel Oak Mortgage Solutions, the largest volume company specializing in “non-qualified mortgage” loans that allow borrowers more generous terms than permissible at Fannie or Freddie, says its default rate is exceptionally low, but it did not provide a specific figure.
