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More Conservative Credit Requirements

The Mortgage Bankers Association (MBA) said that credit access is only about 25 percent of the pre-housing bubble rate from 2004. There are many questions in Washington as to why the housing market is not faring as well with all of the regulatory changes and consumer focused initiatives and protections. David Stevens, the former Federal Housing Administration (FHA) commissioner posits on the current housing market in a Washington Post interview. Stevens, now Chief Executive of the MBA and other key housing industry leaders have discussed the market’s strengths and weaknesses. One key reason for the limited credit and market stalling is credit overlays.

Speaking on what a credit overlay is, Stevens said that lenders are applying more conservative standards than what is required. For instance FHA allows credit scores as low as 500, but most lenders will insist on a minimum of 620 or 640. Lenders do this in order to sell mortgages to Fannie Mae, Freddie Mac or FHA because of having to meet minimum standards for some key variables. He goes on to say that credit scores below 640 have been virtually eliminated from the mortgage market. Stevens say there are other reasons for overlays that include both regulatory and legal risk. Many of the policies are in place for self-protection as the largest lenders have had massive legal settlements for loans that went into default. Lenders feel that they have no room for mistakes and don’t want to risk having to buyback loans that have minor, non-material errors.

See also: Financial Companies Make Updates to Increase Home Buying

Fannie Mae’s Chief Executive recently said that credit overlays are easing, but not as much for marginal first-time borrowers. Wealthier borrowers with big down payments are finding that credit access has increased. This is supported by a Federal Reserve survey showing that nearly 25 percent of surveyed banks said that they’ve relaxed credit standards for prime mortgages, the most since the 2007 housing bust.

Stevens says many of the larger institutions are shifting away from certain products. FHA backed loans being a prime example, which is stepping up its pursuit of pay-backs. If a loan goes to default, then goes to claim and FHA finds a mistake in the file, lenders are subject to treble damages, or three times the outstanding balance of the loan.

The lenders are starting to speak out. Jamie Dimon Chief Executive of JP Morgan Chase has questioned whether his bank will continue to do business with the FHA. His bank has had to pony up $614 million in a settlement to resolve an allegation of improperly approving thousands of mortgages backed by FHA and others. While many banking and housing leaders are concerned about Dimon’s threat, there are many who believe that he told the truth.

Stevens goes on to say that having been someone who has enforced rules and regulations and who spent a lifetime helping people getting into homeownership, the statements made by Dimon and others are not coming from the irresponsible financial executives who helped cause the financial crisis. Many of the irresponsible ones are long gone from the industry. The remaining people are focused on maintaining a safe and sound posture in the marketplace and they can’t expose themselves to greater risk from government and class action lawsuits. Looking at the large settlements, they completely erased all the collective profits from multiple years of mortgage originations at these companies. In other words, it would have been cheaper to be out of the mortgage business based on these settlements, says Stevens.
 
Resource:
 
Washington Post. “A top mortgage industry executive explains why banks don’t want to take a chance on some borrowers” 18 August 2014. http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/13/a-top-mortgage-industry-executive-explains-why-banks-dont-want-to-take-a-chance-on-some-borrowers%E2%80%8B/