Washington Report

Stuck in the credit score logjam

 

Homeownership is now at its lowest level since 1995, in part because so many buyers can’t get past lenders’ severe underwriting requirements.

kenharney@earthlink.net

Are mortgage lenders finally loosening up a little on their credit score requirements — opening the door to larger numbers of home purchasers this summer and fall?

It depends on what type of loan you’re seeking. If it’s a Federal Housing Administration (FHA) insured mortgage, the answer is a resounding yes. The average FICO credit scores for approved applicants for FHA home purchase loans have been dropping steadily this year, according to new data from Ellie Mae, a Pleasanton, California-based company whose mortgage origination software is used by most large lenders.

But if you’re shopping for financing in the much broader conventional market — where most mortgages are purchased or guaranteed by giant investors Fannie Mae and Freddie Mac — scores have not budged for months. They averaged 755 FICO in June, the same as in January, four points below their average for all of 2013. FICO scores run from 300 to 850; higher scores indicate lower risk of default.

Though credit scores represent just one factor that lenders use in determining whether to grant an applicant a mortgage, today’s average scores are far above historical norms and represent a high hurdle for many would-be purchasers — especially first-time, minority and moderate-income buyers.

Phil Bracken, a mortgage industry veteran and founder and chairman of America’s Homeowner Alliance, a nonprofit group that promotes affordable housing, calls current score levels “serious” contributors to a national problem: homeownership is now at 64.8 percent, its lowest level since 1995, in part because so many consumers can’t get past lenders’ severe underwriting tests. The ownership rate for Americans under 35 is 36.2 percent, the lowest on record.

“There are lots of people out there who are creditworthy and should be eligible” to buy a home, Bracken says. Scores are not the only obstacle in their way, but they play a powerful role.

Leaders of both of the country’s major credit score model developers — FICO and VantageScore Solutions — have confirmed to me that banks could reduce their scoring requirements from today’s highs and not materially increase their risk of delinquencies and defaults. In the process, they would increase the volume of mortgages they make, spur more home sales and stimulate employment.

So what’s holding them back? Interviews with top officials at lending institutions suggest something that may not be widely understood by consumers: Fear and finger-pointing are gumming up the system.

Lenders fear that big investors such as Fannie and Freddie will force them to buy back loans they make that have below-par scores or underwriting. Both companies have required lenders to repurchase billions of dollars worth of defective mortgages. In the process, they’ve made banks and mortgage companies hyper-obsessive about delivering pristine loans, even though that means rejecting borrowers they would have funded in the years before the housing boom and bust.

Anthony Hsieh, founder and CEO of loanDepot, a California-based mortgage company that specializes in conventional loans, says his firm cannot afford the risks of deviating from the Fannie and Freddie guidelines — or even tip-toeing close to the line.

“We have no control over credit scores,” he said in an interview. “Until (Fannie and Freddie) put out a directive telling us to provide credit to more Americans, our hands are tied.”

Spokesmen for Fannie and Freddie say they have tried to ease lenders’ fears about overzealous buyback demands and do not require scores to average 755 or anywhere even close. Both companies do assess higher fees on loans they purchase with credit scores below various thresholds — 740 FICOs and above get the lowest fees — but insist they do not dictate scores. They also point out that many lenders set their own score thresholds higher than Fannie’s or Freddie’s, levying “overlays” that increase costs to consumers.

Despite all this, however, there may be glints of hope on the horizon at Fannie and Freddie on credit scores and other fees. Under its new director, Mel Watt, the Federal Housing Finance Agency, which oversees Fannie and Freddie in conservancy, has reached out to lenders and asked for their advice on where to set some of the fees the two investors charge, including those connected with credit scores. The deadline for lenders to respond is Aug. 4.

Though no one can predict whether this will help curtail the finger-pointing and fears that are keeping scores unnecessarily high, there’s a real possibility. And that could be a big deal for buyers in the months ahead.

Kenneth Harney is executive director of the National Real Estate Development Center.

Read more Home & Garden stories from the Miami Herald

  •  
 <span class="cutline_leadin">On demand: </span>Most tankless water heaters come on only when they’re in use.

    Ask a plumber

    Heating water can be a ‘tankless’ job

    The pros and cons of installing a tankless water heater.

  •  
At just 10 inches deep, the Mill console table from CB2 is perfect for decorating an empty hallway ($299).

    Furnishings

    For small spaces, console tables are ideal

    Decorating a small space can be like packing for a weekend trip. There’s room for only the essentials, so every piece should be useful, versatile and worth its weight. If space is a commodity, the console table is one of the most valuable pieces on the market.

  •  
This sleek, mid-century Telechron clock is a handsome collectible.

    Treasures

    Telechron products known for style, design

    Q: I grew up in the 1960s and ’70s with this Lucite clock on a table in my parents’ bedroom. I recently found it in a storage unit of their things and am wondering how old it is, and the approximate value. It still works and has great sentimental value and now has a place of honor on my bedside table. Any information you can provide would be appreciated.

Miami Herald

Join the
Discussion

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK

  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category