Mortgage financing continues to suffer from tight lending

Credit decisions among mortgage lenders continue to tighten, despite recent signs of improvement in both the real estate market and the wider economy. A report released this week by mortgage software provider Ellie Mae shows the average credit score for approved borrowers has actually increased over the past six months. Specifically, mortgage loans signed off by banks and lenders in February had borrowers with an average credit score of 750, up from 740 six months ago, The Wall Street Journal reports. They also had an average loan-to-value ratio of 76 percent, while the average rejected loan applicant had a credit score of 699 and a loan-to-value ratio of 83 percent. Meanwhile, the supply of housing continues to outstrip demand, as foreclosure rates show few signs of allaying. The reluctance among lenders has forced a number of federal institutions to come in and back applications with repayment guarantees. Lenders will often underwrite loans backed by the Federal Housing Administration, even for applicant with credit scores as low as 620 and down payments of merely 3.5 percent. However, even these lending standards have been sharply tightened in recent years, out of concern they'll have to buy back these loans if they default. "To get a different idea of how hard it’s become for some borrowers, consider this: The average credit score for a 'conforming' refinance mortgage through Fannie and Freddie that was denied in February stood at 720, which had traditionally been considered good credit," reports Nick Timiraos for the WSJ. Banks first began tightening their credit decisions when the housing market tanked in 2008, but it still seems to be getting tighter, added Jonathan Corr, chief operating officer at Ellie Mae. Earlier this week, FNC released its Residential Price Index, indicating U.S. home prices declined steadily through the second half of last year. According to the report, non-distressed properties have fallen by 4.5 percent since July of last year, averaging nearly 1 percent per month. The persistent decline in home prices has been driven mainly by conditions in the distressed market. Excess supply - many vacant and neglected - have placed downward pressure on home prices, while high unemployment also continues to constrain demand, despite record-low mortgage financing costs and widespread affordability.