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.
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.