Last year, banks seized more than one million properties. ""RealtyTrac"":http://www.realtytrac.com says over the same 12-month period, the number of foreclosure filings Ã¢â‚¬" including default notices, auctions, and repossessions Ã¢â‚¬" was a record 3.8 million, even though major servicers halted foreclosures during the last few months of 2010.[IMAGE]
Lax underwriting standards during the boom years served as the catalyst for a housing bust that upended not only the mortgage market but the entire U.S. financial system, and has left scores of foreclosures, delinquencies, and vacant homes in its wake.
In order to see what changes the lending community has made, the ratings agency ""DBRS"":http://www.dbrs.com decided to do a side-by-side comparison of the criteria for obtaining a prime mortgage in 2007 versus today's requirements for prime qualification.
In 2007, prime borrowers had a higher ceiling for loan-to-value (LTV) ratio requirements Ã¢â‚¬" a maximum 100 percent LTV, which bumped up to 125 percent combined LTV if other liens had to be taken into consideration.
Debt-to-income (DTI) ratios back then were also higher. Mortgage payments could consume as much as 38 percent of the borrower's income, and total monthly debt levels (including the mortgage and other credit obligations) could equal as much as 45 percent of income.
The minimum FICO score for a prime mortgage in 2007 was set at 620, however, even those without a FICO score could be considered for a prime loan. Lenders only required one past W-2 form, two months of fallback reserve funding, and employment was corroborated as far out as a month before the closing date.[COLUMN_BREAK]
Switch to present-day, and the LTV maximum for prime borrowers is 80 percent, for both the mortgage loan itself and combined LTVs.
DTI levels have narrowed. By today's prime mortgage standards, monthly payments can't be more than 33 percent of income, and total monthly debt obligations can't exceed 38 percent of borrower income.
The minimum FICO score for a 2011 prime mortgage is 680-720, and borrowers without a FICO score are restricted. Borrowers must supply two years of W-2 documentation, hold 12 months worth of reserve funds, and re-verification of employment is made within 10 days of closing.
A closer look at DBRS' analysis of today's prime standards suggests many lenders are already conforming to the mold of a ""Qualified Residential Mortgage"" (QRM).
For a securitized loan to be exempt from Dodd-Frank's 5 percent risk retention rule, it must meet regulators' QRM definition. Federal agencies have proposed a framework that they say carries a low risk of default.
It calls for a 20 percent down payment to bring LTV to 80 percent, conservative DTI ratios of 28 and 36 percent, and strict limits on the number of bad marks in the borrower's recent credit history.
Regulators, though, are getting ""a lot of pushback"":http://www.dsnews.com/articles/industry-and-lawmakers-faceoff-with-regulators-on-qrms-default-impact-2011-06-24 from homeowner advocates, industry trade groups, and more than 300 members of Congress who say the federal agencies aren't following their legislative intent when it comes to QRM.
According to DBRS, both the proposed QRM rule and the underwriting guidelines currently in use for prime mortgages severely restrict credit availability.
""Based on the minimum FICO score, maximum loan-to-value (LTV), and the requirement that a foreclosure, short sale, or deed-in-lieu be at least seven years old, it is likely that most of the U.S. population will not be able to qualify for a mortgage any time soon,"" DBRS says.
""Consequently, DBRS expects the housing recovery to continue to lag for many years to come unless there is a loosening of underwriting criteria by the major lenders,"" the ratings agency concluded.