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Mortgage Lenders Lower Standards

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Faced with declining originations, mortgage bankers lowered their lending standards last month across the board — approving borrowers with lower credit scores, higher loan-to-value ratios and higher debt-to-income ratios. Refinance share plunged to the lowest level in at least two years.

Out of all the applications started 90 days earlier, 55.4 percent closed in July. The closing rate strengthened from 54.3 percent the prior month and 45.8 percent one year prior.

The closing rate on refinances was 51.3 percent in July, while it was 61.4 percent on purchase financing.

The monthly statistics were reported by Ellie Mae based on transactions that were processed through its systems. Ellie said that its Encompass360 was responsible for 20 percent of all U.S. mortgage originations in 2012.

It took an average of 47 days last month to close a loan, the same turnaround as in June. In July 2012, it took a day longer to close the average loan.

Average FICO scores on closed loans dropped to 737 in July — the lowest average score based on Ellie’s oldest data from August 2011. The average was 742 a month earlier and 748 a year earlier.

On denied loans, average FICOs increased 1 point from June to 702.

Average LTV ratios on closed loans inched up to 81 percent from 80 percent in June and in July 2012. LTVs on denied applications were unchanged from the previous month at 84 percent.

DTI ratios averaged 24/36 in July — the highest combined front- and back-end ratio Ellie has reported since August 2011, when the average DTI was 25/36. In the prior report, the average DTI was 23/35, while it was 23/34 in the same report from the prior year.

DTIs on denied applications didn’t move from 28/44 in June.

Lender’s appear to be digging deeper to qualify loans as new business has been on the decline. Based on the U.S. Mortgage Market Index from LoanSifter and Mortgage Daily, new activity slowed by nearly a third between June and July, while August is on track for another 6 percent decline.

Loans insured by the Federal Housing Administration have accounted for 19 percent of all originations each of the three most recent months. FHA share was nearly a quarter a year earlier.

The share of borrowers who chose to go with an adjustable-rate mortgage inched up to 5.2 percent from 4.0 percent in June and 3.1 percent during the same month last year.

“As the average 30-year fixed rate increased to 4.357 percent in July, ARM products have predictably become more popular,” Ellie Mae President and Chief Operating Officer Jonathan Corr said in the report.

Well under half of July’s closings were refinances, off from just over half in the previous report. It was the second consecutive month refinance share has diminished and the lowest share since Ellie began tracking the data in August 2011. A year earlier, refinance share was 58 percent.

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