Getting a Mortgage Becomes Even Easier

Lenders loosen requirements to help borrowers qualify for home loans.
By: RUTH SIMON: The Wall Street Journal Online
Mortgage lenders continue to make it easier for borrowers to qualify for a loan, despite fears that risks are increasing for borrowers and lenders in overheated housing markets.

Among the ways lenders are relaxing their standards: lowering the credit scores needed to qualify for certain loans, increasing the debt loads borrowers can carry and easing the way for borrowers to get loans while providing little documentation. In some cases, lenders are easing standards not only for homeowners, but also for the growing number of people buying residential real estate as an investment.

Looser lending standards are one of the reasons the homeownership rate has hit a record 69% of U.S. households. At the same time, novel loan products -- such as interest-only mortgages -- have helped fuel the run-up in home prices.

Mortgage delinquencies, meanwhile, have remained low, with just 1.08% of residential mortgages in foreclosure proceedings at the end of the first quarter, down from 1.17% five years earlier, according to the Mortgage Bankers Association. Low interest rates and rising home prices have helped keep delinquencies down by keeping monthly payments in check and making it easy for borrowers who run into trouble to refinance or sell at a profit.

But the lowering of standards has also raised concerns that some borrowers could have a hard time making payments, and that defaults could rise. In May, in response to concerns about looser underwriting standards, bank regulators issued guidelines for credit-risk management for home-equity lending. Regulators are working on new guidelines for lenders. In addition, bank examiners are looking more closely at how banks originate mortgages.

"There's been a growing awareness over the past six to nine months that the risks are starting to increase with the very, very rapid price escalation we have seen," says Jim Vanasek, chief enterprise risk-management officer for Washington Mutual. "I would be surprised if mortgage lenders don't do some degree of tightening over the next several months."

So far, evidence of tightening has been hard to detect. "The trend toward relaxing standards is still relatively strong," says Gibran Nicholas, a mortgage broker in Ann Arbor, Mich. Mr. Nicholas expects this pattern to continue as long as foreclosure rates remain low and demand remains high from investors who buy bonds backed by pools of mortgages.

Some lenders say they are being forced to relax their standards to remain competitive. Lenders also say that advances in technology and data analysis enable them to do a better job of determining who is a good credit risk.

The loosening of standards also shows up as products that were initially geared toward sophisticated borrowers have become more mainstream. These include interest-only mortgages and adjustable-rate loans that carry introductory rates as low as 1% and give borrowers multiple payment options.


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