Homes over the past few months have sold at their quickest pace since 2007. But despite low mortgage rates and government efforts to expand mortgage access, borrowers with anything but strong credit scores are still relatively absent, according to a report released Monday.
Real-estate-data firm Black Knight Financial Services said that in August 21% of mortgages to buy homes–as opposed to refinances–went to borrowers with credit scores below 700. That was down from 24% in August 2014 and from 40% in August 2005.
The lack of activity from lower-credit borrowers presents a puzzle for federal regulators and mortgage lenders, which have worked for nearly two years to ease mortgage access.
It also shows the weak base underpinning today’s housing market. While the upper echelon of mortgage borrowers has piled into the market with home purchases and refinances at rock-bottom rates, borrowers with any sort of tarnish on their credit reports continue to be shut out or stay away.
Overall purchase mortgages rose 11% in July and August versus a year earlier, while the volume of purchase loans to sub-700 borrowers actually fell 5%, Black Knight said.
Credit scores are calculated on a scale of 300 to 850, with the national average sitting at just below 700, according to Fair Isaac Corp. In theory, federal mortgage programs allow borrowers to get a loan with a 3.5% down payment with a score of as low as 580.
However, in practice, for the last several years, mortgage lenders have established their own more stringent requirements, with some eschewing borrowers with scores below 640, even if the government backs the mortgage. Over the last two years, federal regulators have worked with banks to try to expand access, and many lenders say they’ve taken many of their own restrictions off.
So what’s going on? Part of the issue might be still-sluggish wage growth. Total compensation grew 2% in the third quarter from a year earlier, the Labor Department said last week. That pace was in line with wage growth throughout the recovery.
In the meantime, home prices rose 4.7% in the year ended August, according to S&P/Case-Shiller, continuing their robust pace. And unlike in the past few years, values of the cheapest third of homes are now rising faster than other tiers.
Combine that mismatch with the near-universal expectation that mortgage rates will soon rise above their sub-4% level, and you have a housing market where something has to give.
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