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Tight Credit in Rearview Mirror?

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Posted On: 02/10/2016

Question: Mortgage rates are under 4 percent and we would like to refinance before they rise, something we think will happen in 2016 because of the Federal Reserve’s expected hikes. What can we do to get past tight credit standards?

Answer: According to the Office of the Comptroller of the Currency, credit standards are easing.

In December, the OCC reported that its annual survey showed easing of underwriting standards at the largest 95 banks and federal savings associations it supervises, reflecting trends similar to those seen from 2005 through 2007, before the financial crisis.

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This easing to pre-crisis levels is not just the by-product of lender whims. There are real reasons behind the softer standards, according to the OCC.

The economic outlook has improved. This is also the reason the Federal Reserve lifted rates in December for the first time since the Great Recession and indicated there’s more hikes ahead.

But lenders have seen that product performance has improved, too. We have fewer foreclosures and delinquencies because of stronger underwriting criteria, such as the requirement that lenders must verify the ability of borrowers to repay their loans. The result is less risk in the marketplace.

And lenders can’t ignore the competition. Today, many mortgages come from nonbanks and online mortgage centers. If you’re a lender you have to compete or you won’t get the business. A competitive marketplace encourages low rates and more underwriting flexibility. Lenders do not have to “layer” loans with more requirements than needed under FHA, VA and conventional loan standards.

Despite widespread complaints by the financial services industry regarding claims of “over-regulation,” the fact is that the new mortgage standards have resulted in a marketplace with little lender risk. Foreclosure levels are way down while homeowner equity has increased markedly.

According to the Federal Reserve, real estate equity has grown by $6.5 trillion in the past five years. This additional equity insulates homeowners – and lenders – against foreclosure. With more equity, owners who get into trouble can increasingly sell at a price that is high enough to fully repay their mortgage debt.

If you’re interested in a new mortgage, speak with several lenders, explain your financial situation and see what they have to say. If you have a weak spot it may be possible to resolve the problem before you actually make an application. For example, if there is a factual error on a credit report, get it straightened out before applying for a mortgage.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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