(Reuters/Rick Wilking)

True: The average credit scores for borrowers on most mortgages -- those backed by the federal government -- were lower in March than they were a year earlier.

False: These lower scores suggest the credit crunch that’s kept many potential home buyers on the sidelines is easing.

These are the two basic conclusions in an analysis released Friday by the Urban Institute. The group took a close look at the mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration, which together support about 80 percent of the mortgage market.

The Urban Institute found that the conventional mortgages that lenders sold to Fannie and Freddie combined (meaning loans less than $417,000 with at least a 5 percent downpayment) had an average credit score of 752 in March, down from 758 a year earlier. The same trend applies to mortgages backed by FHA, a popular source of low-down-payment loans for cash-strapped, first-time buyers. The scores on those loans averaged 686, down from 697.

But pool all those loans together, and not much has changed in a year. Or at least the change isn’t nearly as dramatic.  The average credit score remains around: 730.That’s pretty darn high compared to the 700 average before the housing bubble, when lending standards were extremely lax. The nation’s most widely used scoring formula, called FICO, ranges from 300 to 850. The higher the number, the better the score.


The study’s authors --  Jun Zhu, Laurie Goodman and Bing Bai -- attribute the phenomenon to loans that shifted from FHA to Fannie and Freddie, also known as government-sponsored enterprises or GSEs. The FHA has raised certain fees it imposes on borrowers five times since 2010. As a result, borrowers with higher credit quality fled FHA for better deals on loans backed by Fannie and Freddie, which tend to cater to borrowers with better scores.

“The FHA is losing borrowers at the higher end of its credit score spectrum and lowering its average credit score,” the analysis said. “GSE’s are absorbing borrowers at the lower end of their credit spectrum, also dragging their average score down.”

In an interview, FHA Commissioner Carol Galante said that 50 percent of all home purchase loans were backed by the FHA in 2008 but that the agency’s market share now stands at about 20 percent. Still, the shift may not be due entirely to fee increases.

“The last set of premium increases went into effect literally at the same time that mortgage interest rates jumped, so it’s hard to disentangle how much of the drop is related to premium increases versus interest rate increases,” Galante said.  “It’s also important to note that activity in the whole mortgage market dropped when interest rates started to go up, so it’s not just FHA volume that’s down.”