Mortgage Bankers Association (MBA) Chief Executive David H. Stevens recently went on the record about how some lenders are barring access to mortgages for certain borrowers, in a recent interview with The Washington Post.
Access to credit is running at roughly one quarter of the pre-housing bubble rate of 2004, MBA says.
“Lenders are applying standards that are more conservative than required,” Stevens tells The Washington Post, citing key minimum standards for lenders to sell mortgages to Fannie Mae, Freddie Mac or the Federal Housing Administration (FHA) include credit score, amount of debt and documentation. “For instance, FHA allows credit scores that can be as low as 500, but most lenders insist on a minimum of 620 or 640 because they think it’s risky to do anything under that. They’ll demand a higher credit score on a loan because data shows that higher scores perform better.”
Citing MBA’s analysis of credit score trends, credit scores below 640 have been all but eliminated from the mortgage market.
Lenders are taking measures to protect themselves, which is fueled by recent examples of lenders involved in massive legal settlements for loans they made that went into default.
And banks who follow the rules can be hurt by borrowers who default years after making payments.
“But there are others that don’t make the headlines,” Stevenson says. “We have cases where lenders hired third-party appraisers, and followed all the requirements for ordering an appraisal. The borrowers made their payments for five, seven or even 10 years before defaulting.”
The reason for defaulting many years later is often due to economic or employment changes, and not the loan originator, he says.
Speaking against a zero tolerance policy for errors, Stevens says it comes down to inevitable human error.
“The likelihood of a minor defect is almost 100%, like getting the middle initial wrong on the application versus the title,” he says.
In reference to the latest Federal Reserve data in July showing that banks have loosened standards for prime mortgages, Stevens says MBA sees credit standards easing for wealthier borrowers with big down payments rather than marginal first-time borrowers with less wealth and lower down payments.
Read the full article here.
Written by Cassandra Dowell