Stevens: Banks Hurting Creditworthy Buyers

By Robert Freedman, Senior Editor, REALTOR® Magazine

When you look at the success of FHA over the last few years since the downturn you have to wonder what’s up with the banks.

Although the agency has had its credit challenges it never lost sight of the tough times borrowers face in the market today.
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A case in point is its credit score policy. Even for struggling households whose credit score is as low as 580, the agency will back their mortgage as long as they’re buying their primary residence and they can show they’re prepared to be responsible home owners—and they can still get a low down payment.

FHA’s reward for this policy, if you can call it that, is a 30-percent market share and a continuing sound financial position, notwithstanding the chatter in the media earlier this year when it took steps to boost a secondary reserve after it dipped below a congressionally mandated level.

You see nothing like this with the banks, despite the tens of billions of dollars they received from the federal government under the Troubled Asset Relief Program (TARP) and the Federal Reserve’s $1.25 trillion investment in mortgage-backed securities.

Banks today will hardly look at borrowers with credit scores below 650. And for those with scores as low as 620, households probably don’t even get the option of submitting an application.

This is more than a shame for the borrowers, many of whom, as FHA has demonstrated, are well prepared to be home owners; it’s an unnecessary constraint on home sales.

Speaking before REALTORS® yesterday at the NAR Conference & Expo in New Orleans, FHA Commissioner David Stevens said banks’ cookie-cutter approach to who can and can’t qualify for mortgage financing is artificially constraining home sales by as much as 20 percent of the market at a time when the economy is looking to a healthy real estate sector to spur growth.

“We need to hold banks accountable,” he said. Banks shouldn’t be using “a FICO score to determine a one-size-fits-all scenario” for borrowers.

Stevens, a 30-year mortgage and real estate industry veteran before heading up FHA two years ago, said it wasn’t that long ago that loan originators had no choice but to look carefully at each and every mortgage application and determine applicants’ creditworthiness not based on a credit score but on what they could glean from their file. That practice started to change in the mid-1990s with the introduction of automated underwriting programs like Loan Prospector, which uses credit scores and other data to enable underwriters to calculate loan risk without originators having to delve deeply into applicants’ files.

Stevens suggested lenders bring back some of those traditional underwriting practices because too many borrowers today aren’t getting a fair shot at mortgage financing.

Given that the huge echo-boomer generation is entering prime home buying age, the mortgage industry faces an imperative to get its act together, he suggested. For many of these young people, all they know about home ownership is the mortgage meltdown. Stevens said he’s concerned about losing this generation of households to home ownership if the banks don’t start closing what he called their “trust deficit” with consumers.

“Payback is due,” he said. After TARP, after the Fed’s intervention in the market for mortgage-backed securities, and after its accommodative interest rate policy (which Stevens said has handed banks a refinance boom), the banks need to start looking beyond credit scores to find creditworthy borrowers one at a time. “Stop eliminating 10 to 20 percent of the market for people who are able to buy a home,” he said.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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Comments
  1. Jeannie

    Amen! It’s time lenders realize that people who have had a setback due to job loss or illness or whatever, and are working on becoming credit worthy again and are able to make a house payment. Check their utilities, their rent, not just that damn INFERNAL FICO score. You will see how they are trying their best to get on their feet again. A lot of people are paying outrageous rent each month – on time – and who could be putting that rent towards a home; however, the ruthless, arrogant and simply stupid bankers treat these potential applicants like something they want to wipe off their shoe. I have no respect for bankers or any mortgage lender anymore.

  2. Tim In Fla

    Interesting read, but its all been said before. First Mr Stevens should be aware we have no “Underwriters” to look at borrowers history anymore. We got rid of them with the “Loan Prospector” or “Desktop Underwriter”. This is all done now by checkbox review and usually outsourced to India or wherever the cheapest labor can be obtained. Underwriters were overhead and that just could not sustain the level of bonus required to maintain top executives. The second thing Mr Stevens should also be aware of is that we have no more banks. We have “financial services corporations”. Lending is far down the list of what they like to do. Trade their own stock, take hedge positions, sell insurance, collect and sell data on their clients or anything else but that pesky lending thing.

    However,….they will take applications, and lots o f them ! Feel free to apply and pony up $600 -$700 for credit check ($), The aforementioned “Underwriting Fee” ($$) and a blow the deal apart low ball appraisal from an owned or in house Appraisal Managment Company ($$$). Hard costs to a lender (loosely used term) about $275.
    Which leaves a nice little pure profit of $325 – $425 per application. Without ever lending a nickel or taking on any risk. Financial Services is a way better business model than “banking” or “lending”. Why change ?? Thanks Mr and Mrs first time homebuyer for playing our game.

    Years ago this would be considered theft, deceptive practice, fraud, etc. Now it is a succesful business model. It doesn’t matter what HUD will do for these crooks. As long as anyone can make money for nothing and its legal they will continue to do it.

  3. I blame banks for a lot of what is going on in the market right now. I wanted to pay off my credit cards early by getting a card that has 0 interet for 18 months and transferring my balances to this card…I cannot get a card because even though my payments have been on time and more than asked for my debt ratio is too high. When I get everything paid off and Real Estate is actually selling – I will NEVER do business with these banks again! Nor will I recommend them to my Buyers!

  4. Tom Lawler

    Clearly, lenders, the FHA, the NAR, and everyone should be focsed on “sustainable” homeownership, and making credit available to home buyers who both can afford to buy a home, and who either are able to initially have a strong equity stake in their home via a decent sized down payment, or, if they are unable to do so, buy a lower priced home using a mortgage where a decent amount of each mortgage payment goes to paying down the principal of the mortgage. One of the “learnings” of the recent housing/mortgage meltdown is that “sustainable” homeownership is not just a matter of what a borrowers “debt to income” ratio is, but home much equity a borrower has in his/her home. Low down payment mortgages need to ensure that homeowners build equity without relying on home price inflation; that doesn’t happen if the borrower pays down principal on a 30-year amortization schedule. And if a borrower gets in trouble and does not have any equity in his/her home; well, problems happen.

    The clear implication is that “sustainable” homeownership must be defined not just in terms of debt to income and affordability, but the equity a borrower has in the home over time. 30-year mortgages should require decent sized down payments because of the slow repayment of principal; and low/no down payment mortgages should be limited to 15-20 year amortization mortgages so that borrowers build equity without relying on inflaiton. It’s not rocket science; it’s common sense. Borrowers who have materially equity in their home do not lose their home to foreclosure very often, but borrowers who run into problems and have no or negative equity do. DUH. (which is, of course, HUD spelled backwards).

  5. Quite frankly, I am finding that even buyers with credit scores in the 700 to 800 range who wish to purchase mid to higher priced homes are being “tossed around” during the lending process with no certainty about whether they will receive the loan until the last possible moment. Selling homes to credit worthy buyers who will then hire contractors to work on their homes could have a significant positive impact on our economy.

    Furthermore, I keep reading about the excessive costs that Fannie Mae and Freddie Mac are incurring to “maintain” foreclosure properties. I just finished a five month “battle” to sell a home that had been on the market for 2.5 years (only the .5 was on my watch) only to watch Fannie Mae refuse to accept the cash offer for half of what was owed and then take the deed in lieu of foreclosure. I anticipate further damage to this property as winter arrives. And what will the value be by spring or next fall when the property eventually gets sold?

    Another Seller who just went through a divorce told me today that he tried to work out a payment plan with his lender only to have the lender say that they will begin pre-foreclosure proceedings. This man wants to stay in the house and CONTINUE TO PAY THE LOAN BUT AT A LOWER INTEREST RATE. Where is the assistance that we heard was coming for these matters?

    I am not leaving the profession as many other Agents and Brokers have decided to do. I’ll just continue to gather knowledge, provide excellent customer service, and continue to sell real estate.

  6. Rob - NW appraiser

    Tim above has it right. Everything is getting outsourced and automated to the point that there are no judgement calls anymore, as though we are all robots that should travel the exact same paths making the exact same choices. Don’t get cancer, or you will have a lower credit score because of medical bills, and will be doomed to renting. I’ve been in in the industry for 15 years now, 4 as a mortgage broker and 11 as an appraiser and things are so screwed up right now. I’ve watched doctors get turned down trying to buy a $700,000 home, having perfect credit, great earnings and 30% down payment, and no one could explain why he was being turned down. Did I mention that both husband and wife were doctors earning rediculous salaries? Anyway, thank god I played my cards right over the last 15 years! It will be another 5 before one can make decent money in this industry. Thanks HVCC.

  7. So, what is NAR going to do with this information? Wouldn’t it be prudent to lobby the congress and see if we can get some action? How about every member of NAR calling their congressman or woman and asking for a constituent meeting to see what they are going to do about the housing crisis and banks stpping on the air hose of creditworthy clients?

    How about lobbying state legislatures to make sure state regulate dbanks are not doing the same? It’s one thing to complain, it’s another to take action.

  8. Adekunle Paul-Coker

    This is one piece commentary that hits the nail dead center and is totally true. This one thing advice I have given to some of my banker friends to take back to their banks. With the little studies I did at the Chartered Institute of Bankers’ in the UK, I realised that a clever lender will grab the best share of the market now before the sleepy banks realise what’s actually happening. This is the time when the little players in the mortgage business could acquire a fair share of the market. It is no surprise that FHA is doing so well, they have a better captain of the ship, than most of these banks. The banks have made it almost impossible, for us realtors to get deals done. I have to say they will only have themselves to blame, for the next few quarters of reduced profits. The banks will not make money from hiking up fees on other products because that will cause customers leaving the banks in droves. Wake-up banks before you all lose your jobs. Indeed there are numerous other ways of looking at protential customers.

  9. Franco Rogate'

    There cames a time when one needs to reevaluate the norm in order to best serve prospective home owners in need of financing. FICA and or CREDIT scores during these economic times although essential should not be the determining factor on loan approvals. The worthiness of future home owners should be based on performance. Rents paid on time, car payments on time, CC payments on time.This History should be a major part of the equasion. For only serving the few that escaped the tragedy of these times not only is it unfair and weekening the Housing Market, it is also discriminating. As a REALTOR I belive that hard working, tax paying US Citizens deserve a second chance for the American Dream”HOME OWNERSHIP”

  10. Tanya McDonald

    I have to agree with you. There are certain ircumstances that may have arose that affect your credit score and even if you are a person who pays their bills is not allowed to purchase a home. For example, I went through a very nasty divorce and my credit was affected. I paid to go through a housing program as well as I paid everything off and because my three credit scores are 643,597,600 I do not qualify for FHA. I m told to get more credit to build my score. How much sense does that make. What is going to be done about it. I would love to buy my own home.

  11. Banks are in the business of lending with various risk models associated with levels of lending.

    Yet, with almost zero borrowing that they are capable of getting from the Feds and buying 3% 10 Year Treasury Notes, puts them in a riskless earnings situation. Similar to what happened in other smaller countries.

    So, what is their incentive for lending to ordinary consumers, especially when they see a decline in home values. Affordability is the highest it has ever been, yet lending is significantly down. Check out the profitability of Goldman Sachs, JPM Chase, Bank of Am, Wells Fargo, Citibank etc. If consumers are defaulting in such large numbers on thier mortages, how come their profitability is so high?

    A) They received TARP money and used it for their own profitabiltiy instead of helping consumers.
    B) They use arbitrage in US debt to create profit for themselves.

    So, the consumers who pay taxes just got thrown in the wringer and yet we went through another cycle of elections with “nothing done.”

    Congress should consider taking away the charter for these banks or making them more accountable to move the money around.

  12. I recommend a trusted, local, family-owned mortgage company here in my area. They have their own in-house underwriter and I always ask my buyers who are using this company to get their application completed and go through preliminary underwriting. The underwriter is a sharp cookie and gets an answer back in one day versus a large bank around here that has to “share” the only underwriter they have with their multiple offices.

    As a similar situation that Rob, NW appraiser, describes above, I also know of one couple with high income, decent credit scores. Both husband and wife are doctors, but their credit report reflected they NEVER paid their credit payments ON TIME – they eventually made their payments, but NEVER on time. Now, we know, or we as real estate agents should know, credit history makes up approximately 30% of your credit score. So, folks out there need to know that it’s just not how many bundles of cash you make each month, it’s alot about paying back the money you’ve borrowed ON TIME (be it a car loan, credit cards, school loans, personal bank loan, etc.).

  13. If the FHA is so solvent, why did they recently raise the monthly mortgage premiums?

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