Homebuyer access to mortgage credit has been well-chronicled, as a combination of post-recession regulations and historical awareness have deterred many lenders from taking chances on fringe borrowers.
President Barack Obama has offered public pleas to banks, contending that a greater number of qualified home loan applicants should be granted reasonable loan terms. Yet, according to the Mortgage Bankers Association's most recent Mortgage Credit Availability Index, any trend toward increased access has been minimal, even as Americans continue to exhibit improved debt management abilities. Loans insured by the Federal Housing Administration and the Department of Veterans Affairs have been the exception, allowing lower-income borrowers and those with credit scores that fall short of Qualified Mortgage standards to still take advantage of low down payment options and more flexible terms.
Guarding against history repeating
Still, as a recent Washington Post piece detailed, there are hurdles that remain, even for borrowers who would seem to be eminently qualified. The MBA estimates current access to mortgage credit, while improving, remains at about 25 percent of where it stood during the housing market bubble. Certainly, those were different times, and pre-recession lending practices taught the industry many lessons. However, as Obama has noted, a healthier housing market would make it "easier for qualified buyers to buy the homes they can afford."
David Stevens, a former member of the Obama cabinet and the current president of the MBA, explained to the Post that many traditional lenders are still hesitant to make changes - although there are indications that may be changing. Credit overlays - when different standards are applied by a private lender, as opposed to a government-sponsored enterprise, such as Fannie Mae or Freddie Mac - sometimes exacerbate the issue.
"But lenders are applying standards that are more conservative than what is required, and those are the credit overlays," Stevens said. "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."
Stevens added that many of the practices lenders are abiding by are self-imposed, employed for their own protection. Prior to and during the recession, too many loans of all types went into default, often resulting in lengthy legal proceedings, many of which led to lenders being forced to pay settlements. As a result, those who have remained in the mortgage lending business have implemented new standards for accountability, sometimes on top of the already existing regulatory mandates. Case in point: The MBA's MCAI for July registered a reading of 116.4 - up from 115.9 in June. The index debuted in 2011, but had it existed in 2006 at the height of the bubble, mortgage credit availability would have topped out at nearly 900. That's the recent history many lenders are working against, so the extra precautions are understandable.
Changes for the better?
According to a Federal Reserve survey from July, about 25 percent of banks claimed they had loosened standards for prime mortgage loans - the highest percentage seen since 2007. And Fannie Mae Chief Executive Tim Mayopoulos told the Post credit overlays are easing, even compared with the environment that existed earlier this year, when QM was first enacted.
Meanwhile, FHA loans are becoming more attractive, in part because the administration has recognized the void and attempted to fill it.
"We are clearly seeing a shift away from certain products by the larger institutions," Stevens said. "FHA is a prime example. FHA is stepping up its pursuit of pay-backs. If a loan goes to default, goes to claim and FHA finds a mistake in the file, you are subject to treble damages, or three times the outstanding balance of the loan. The risk is very significant."
Stevens suggested that, while lenders need to be held accountable for irresponsible practices, greater clarity from the regulators would help streamline the system. In other words, lenders will be more comfortable and practical in their risk assessment if they know how exactly they will be held accountable. Given the number of regulatory bodies involved in housing finance - the FHA, the Federal Reserve, the Department of Housing and Urban Development, the FDIC, the Justice Department and the Department of Labor, among others - some of that is simply a matter of getting everyone on the same page.
Homebuyers, meanwhile, should continue to explore their options and simply choose the loan product that best fits their budget and needs. Right now, particularly for borrowers who have finances in order but don't quite meet QM standards, that usually means pursuing an FHA or VA loan. But as the shift Stevens referred to continues, a greater range of options could become available.