WASHINGTON - A key executive in the home loan industry says credit standards are steadily deteriorating.
Michael K. Stamper, executive vice president of risk management at Freddie Mac, told American Banker that the three primary indicators of credit quality at Freddie Mac were all "going in the wrong direction."
Mortgage amounts relative to the value of the property are "about as high as they've ever been in our history," Mr. Stamper said.
The debt carried by borrowers has increased significantly relative to their incomes in the past year and a half. And the percentage of borrowers with poor credit histories also has increased.
Mr. Stamper's comments were particularly significant because he was referring to the broad spectrum of home mortgages, not just the low-down- payment loans being made under special affordable-housing programs. Leland C. Brendsel, chairman of Freddie Mac, had previously reported high delinquency rates in that limited corner of the market.
One troubling influence, Mr. Stamper said, is overcapacity in the mortgage industry, as too many lenders chase fewer loans in the post- refinance market.
"It could be the case that originators are now looking at loans and trying to find ways to qualify borrowers that a year and a half ago, when they were doing all the refis, they wouldn't have bothered with," Mr. Stamper said. "And we worry about that."
Last month, Freddie Mac acted to tighten scrutiny of the riskiest loans it buys.
In a letter to lenders, Mr. Stamper said Freddie Mac had decided to use credit scores to identify loans with a higher probability of default. More of these loans will now be reviewed by the agency.
For such loans, Freddie Mac has asked lenders to "perform a particularly detailed review" of the borrower's credit history.
The president of a large California-based lender attributes the worsening credit profile to "negative selection" in the fixed-rate mortgage business over the past year.
With adjustable mortgages indexed to the 11th district cost of funds being priced several percentage points below fixed-rate loans, "fixed rate lenders (became) sort of a last resort," said Terrance G. Hodel, president of North American Mortgage Co., Santa Rosa, Calif.
Borrowers with poor credit histories who weren't able to get the adjustable-rate mortgages went for the more expensive fixed-rate loans, he said.
Some longer-term factors may also explain the changing credit profile, particularly the increase in high loan-to-value mortgages.
Consumers are putting smaller down payments against their homes, in part because mortgage debt is tax-deductible but other kinds of consumer debt are not, according to Mr. Stamper.
Also, slow home price appreciation means that borrowers get less from the sale of their homes and put smaller down payments against their next home, he said.
At mortgage insurer MGIC, the ratio of loans with loan-to-value ratios of 95% has shot up from 32% of all business last year to 44% in the first half of this year, according to Curt Culver, executive vice president of marketing and capital markets.
Freddie Mac did not release current statistics on its loan purchases. But according to its 1994 annual report, 9% of loans purchased in 1994 had loan-to-value ratios greater than 90%. That was a three-fold increase from 1992.
Some portion of the increase in high loan-to-value business, Mr. Stamper noted, can be traced to the shift from a market dominated by refinance loans to a purchase market. But even within the purchase market, he said, loan-to-value rations have risen.
Last year, both Fannie Mae and Freddie Mac acted to increase mortgage insurance on high loan-to-value loans, in response to the changing mix. Mr. Stamper said he did not know whether that measure has helped to control the increase in high loan-to-value loans, but Freddie Mac plans no further steps at the moment.
