Lenders 'Friendlier' to Riskier Borrowers

Home loan lenders are increasingly courting mortgage applicants who, in the past, may have been rejected or seen as risky, according to a recent credit availability report.

The Urban Institute’s Housing Finance Policy Center report finds that lenders are welcoming applicants with lower credit scores, higher debt-to-income ratios, and smaller down payments, and that government-backed entities Fannie Mae and Freddie Mac have been taking on riskier applications “steadily since the financial crisis," and the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the Agriculture Department’s rural home loans program are taking on risk at the highest level since 2009, The Washington Post reports.

John Meussner, executive loan officer with Mason-McDuffie Mortgage Corp. in San Ramon, Calif., sees hints of trouble ahead.

“I have definitely noticed a fast uptick in ‘creative’ [loan] products coming out,” he told me. “Recently, we saw one investor roll out a product offering up to $2 million in financing for FICO scores down to 600.” The loan allows borrowers to have made a late payment on a mortgage within the past 12 months and have multiple credit incidents (such as a bankruptcy or foreclosure). The loan also requires the borrower to have just three months of reserves for loan amounts to $1 million. “This is something we haven’t seen since before the crash,” Meussner said.

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