The Flip Side of Weak Lending: Higher Pull-Through Rates
There is a silver lining to weak demand for home loans: lenders are doing a much better job closing the loan applications they are getting, and they're doing so in a shorter period of time.
Though regulators have complained about tight underwriting guidelines, stricter credit has not necessarily increased the risk that a loan will fall out of a lender's pipeline and fail to close.
Rather, the dearth of loan applications may be helping lenders become far more proficient. In such a weak market for home purchases, lenders appear to be spending far fewer man-hours processing loans that do not actually materialize in a home sale.
"We're not doing a lot of sales and those (borrowers) that do apply appear to be pulling through," says Mark Fleming, the chief economist at CoreLogic, the Irvine, Calif., data and analytics firm.
Originators' pull-through rates have improved dramatically in the past four years, though they are still far below the easy-lending days of 2003 to 2007, when many borrowers were not required document their income. During those heady days, pull-through rates averaged 70% or higher.
By contrast, loan officers had an average pull-through rate of 55% in April, down from a recent high of 58% in March, according to data from Ellie Mae, the Pleasanton, Calif., origination technology firm.
The flip side is that 45% of loan applications did not get funded or approved in April, a still-significant number. Nearly half of all loan applications do not result in a loan.
Pull-through rates are an important gauge of the industry because lenders try to avoid spending money underwriting and processing loans that ultimately fail. A lender's pull-through rate measures the percentage of loans that get funded out of the total number of applications.
Paul Anastos, president of Walpole, Mass. retail lender Mortgage Master, says the key to maintaining a strong pull-through rate is for loan officers to better communicate with borrowers.
"The reason why a loan doesn't pull through is typically the loan officer is not setting the proper expectations," Anastos says. "People are scrambling to try to make loans work. They may take a loan application that should not have been taken in the first place. Sometimes there are difficult deals or the borrower need to get credit counseling before starting the process."
Lenders monitor their pull-through rates monthly. In an effort to reduce the amount of work spent on loans that don't get funded, many lenders link loan officer compensation to pull-through rates as an incentive to do a better job up-front screening out borrowers who are unlikely to qualify.
But there are plenty of reasons to explain why some applications don't end up with a funded loan.
Loans that do not close could still be active applications or they might have been withdrawn by consumers or denied because they were incomplete. Many borrowers complain they are unable to find the homes because of a dearth of inventory. So a potential homebuyer might fill out an application that goes nowhere. Many potential homebuyers fill out multiple applications with several lenders, which also skew the data.
In another positive sign for the industry, it took an average of 39 days to close a loan in April, down from 40 days in March and an industry high of 55 days in December 2012. While that is far from the notorious three-day close during the height of subprime lending, the drift downward in the time it takes to close a loan is good news to borrowers overall. The Ellie Mae data is gleaned from a sample of applications its users, typically midsize mortgage bankers, have processed with its loan origination system.
In the past few years, lenders have hired more quality control and compliance officers to examine loan applications, resulting in longer delays and wait times. Lenders are trying to catch loan defects ahead of time to avoid being forced to buy back a loan down the road.
Despite greater quality control efforts, the 55% pull-through rate is in some ways a sign that mortgage lenders have become more efficient since the downturn. Borrowers that refinance generally have higher pull-through rates since they previously had a loan funded. But refinance applications have fallen off a cliff since last year.
Though purchase applications reached a 19-year low in February, the quality of loans has generally been quite high.
Loans that closed in April had an average FICO score of 726, a loan-to-value ratio of 82%, and a total debt-to-income ratio of 37%. By comparison, loans that were denied had an average FICO of 680, an LTV ratio of 82% and higher average total debt-to-income ratios of 44%.
Fleming says the data indicates that perhaps some borrowers are simply not applying for loans even though credit is available.
"We don't know who doesn't show up," he says. "There could be a self-selection process and they aren't showing up because they've heard how hard it is to get a loan, so why apply when it's so hard. And that influences the pull-through rate."