The Nation's Housing: Underwriting restrictions
Trying to open the spigots
By Kenneth Harney
Two federal agencies with far-reaching influence over the
mortgage market are working on a problem that could affect the ability of many
consumers to obtain a home loan: How to encourage private lenders to ease up on
their underwriting restrictions that go beyond what the agencies themselves
require for mortgage approvals.
Both the Federal Housing Finance Agency, which oversees
giant investors Fannie Mae and Freddie Mac, and the Federal Housing
Administration, which runs the low-down-payment FHA program, are considering
steps they might take to persuade lenders to open the mortgage spigots a little
wider.
Together, Fannie, Freddie and FHA account for 90
percent-plus of all home loan funding. The focus of their little-publicized
reform projects: the "overlay" rules many lenders have adopted that
lump extra fees, larger down payments and higher credit-score requirements onto
home loans than Fannie, Freddie or FHA actually require.
For example, Fannie and Freddie may accept FICO credit
scores of 660 to 680, and FHA will approve applications with scores as low as
580. Yet lenders originating loans for them often want to see scores 100 points
higher. Another example: FHA recently inaugurated a "streamline refi"
program designed to encourage widespread refinancings for borrowers with good
payment histories by offering low mortgage insurance fees, no appraisals and no
credit checks.
Great idea, but lenders have clamped their own more
stringent underwriting restrictions on the program, frustrating consumers. Some
banks require full appraisals, credit checks and add-on fees. Other lenders
have announced that they are limiting eligibility for the program to customers
they already service, despite the fact that FHA allows borrowers to seek
streamline refinancings from any FHA-approved lender.
Why are lenders making it tougher than necessary for
creditworthy applicants to obtain a mortgage? Tops on the list: They are practicing
what one prominent mortgage industry consultant describes as "defensive
lending."
"Defensive lending is the mortgage equivalent of
defensive medicine," where doctors run more tests than needed to reduce
litigation risk, said Brian Chapelle, principal at Potomac Partners in
Washington, D.C. "Rather than more medical tests, mortgage lenders are
adding underwriting requirements and program restrictions to avoid overstepping
a sometimes ambiguous line" that will trigger penalties from Fannie, Freddie
or FHA.
Even minor technical infractions in underwriting or
documentation can cause "buyback" demands by Fannie or Freddie when
loans go into default, with costs per loan for the lender sometimes soaring to
hundreds of thousands of dollars. Plus the Justice Department is putting
pressure on major banks to pay millions of dollars to settle allegations of
systemic flaws in their mortgage practices — settlements the banks consent to
not on the merits but to avoid protracted litigation and hits to their stock
prices.
On top of this, banks and other originators are uncertain
about upcoming mortgage regulations that stem from the Dodd-Frank financial
reform law that will spell out the rules for future lending.
In a nutshell, said Chapelle, government agencies and
Congress have fostered a play-it-ultra-safe environment, where the pressure is
intense to lend only on the most conservative terms, even if that means turning
down creditworthy applicants.
What to do? The two agencies are mum about specifics but are
expected to announce reforms sometime in the coming weeks. Lenders, on the
other hand, know precisely what they'd like to see. Steve O'Connor, senior vice
president of the Mortgage Bankers Association, said lenders want several key
changes in current procedures, including clear, point-by-point guidance on how
the agencies will define reasonable grounds for buybacks or indemnifications
going forward. Lenders also need assurance that after an agreed-upon period of
time — say, 24 to 36 months — they will not be blamed for deficient
underwriting on a loan that goes belly up. Some mortgage companies have been
confronted with buyback demands on loans that defaulted for economic reasons
after seven or eight years of on-time payments — "That's crazy," said
O'Connor.
FHA lenders, said Chapelle, also want greater fairness in
the way they're treated when loans default, including revisions of lender
monitoring standards that evaluate them poorly when they try to accommodate
borrowers with lower credit scores and other blemishes.
Bottom line: Lenders say they could loosen up a little on
underwriting when federal agencies ease their buyback demands. Since the two
top agencies are trying to figure how to do this, homebuyers might see slightly
less punitive "overlay" fees and underwriting later in the year.
Don't hold your breath but it could happen, and just might
help you get approved for a mortgage.
kenharney@earthlink.net /
Washington Post Writers Group
1 comment:
Coach,
Pressuring lending institutions (Fannie and Freddie)to make unsound loans was exactly what got us into this mess to start with. I think we would all like to see more loan qualified buyers in the market. We are all just going to have to ride this out til the market swings back into supply-demand equilibrium. That recovery is going to be regionalized and choppy at best.
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