Lenders Reach Farther Out Credit Spectrum to Fill Capacity

By: Matthew Graham •

Among closed loans in February, the share of refinances fell to 43 percent from 47 percent in January, and from 68 percent in February 2013, according to to Ellie Mae's Origination Insight Report.  Every month, Ellie Mae compiles statistics on closed and denied loans processed through its Encompass software, which accounted for 3.5 million transactions in 2013.

Consistent with the increase in the share of purchases, FHA loans accounted for 22 percent of the total compared to 21% in January, and the share of 15yr terms (more prevalent among refinances) fell to 12.2 from 15.0 percent.

Average closing times moved appreciably lower to 41 days from 45 days in January.  Faster closings and decreased refinance share both suggest lenders are operating under capacity.  A look at the changes average credit scores confirms that lender approvals have had to move farther out the credit spectrum to fill that capacity. 

"There has been significant loosening compared to where we were a year ago," notes Jonathan Corr, President and Chief Operating Officer of Ellie Mae. "The average FICO score on all closed loans was 724 in February 2014 compared to 745 in February 2013, or a 21-point decrease. Last month, 33% of closed loans had an average FICO score under 700 compared to 24% in February 2013."

One aspect of the report that does not corroborate decreased refinance activity and excess capacity is the monthly change in average interest rates.  Ellie Mae notes a lower average 30yr Fixed rate in February--4.655 compared to 4.723 in January.  This makes the decrease in refinance share seem counterintuitive. 

The issue likely stems from much higher rates in the early part of January--not a typically busy time of year.  As consumers got down to business for 2014, rates fell sharply, leading to increased refi demand by the end of the month.  While February's rates may have been lower on average, they never made it down to late January levels, where a majority of the month's volume was concentrated.