I call this “lending into the storm.”
A national mortgage lender has just introduced a 105 Loan-to-value (LTV) ratio loan and a lowering of FICO scores from 660 to 620.
Now, the loan still requires 97% LTV with downpayment assistance and gift funds permitted to boost CLTV to 105%.
With The Fed helping to raise home prices at a whopping 20% YoY, …
lenders are trying to find loan products for lower-income households so they can get in on the bubble! Hence, a 105% CLTV mortgage product with reduced credit requirements and increased Debt-to-income requirement rising from 43% to 45%. Also, borrowers can avoid the 3% downpayment requirement and put down only $500.
This is lending into the storm: softening of underwriting requirements as the house price bubble surges. Sound like 2005. This was not supposed to happen. After the housing bubble burst and the financial crisis, The Fed was supposed to encourage counter-cyclical lending (tighten credit standards as a housing bubble worsens). Instead, lenders are lowering credit standards, feeding the house price bubble.
If this was just one lender, I would have barely noticed. But this mortgage is being offered by most banks.