The Federal Housing Finance Agency and the Federal Housing Administration say many lenders' underwriting restrictions go beyond what the agencies themselves require.
By Kenneth R. Harney
July 8, 2012
WASHINGTON — 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 the FHA account for 90%-plus
of all home loan funding. The focus of their little-publicized reform
projects: the "overlay" rules many lenders have adopted that call for
extra fees, larger down payments and higher credit scores than Fannie,
Freddie or the FHA require.
For
example, Fannie and Freddie may accept FICO credit scores of 660 to
680, and the 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: The 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 the 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 the 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,
Chapelle says, 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 Assn., says
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 indemnification 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," O'Connor said.
FHA
lenders also want greater fairness in the way they're treated when
loans default, Chapelle said, 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, home buyers might see slightly less
punitive "overlay" fees and underwriting later in the year. Don't hold
your breath, but it could happen and it just might help you get approved
for a mortgage.
Distributed by Washington Post Writers Group.
Copyright © 2012, Los Angeles Times
By Kenneth R. Harney
July 8, 2012
WASHINGTON — 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 the FHA account for 90%-plus
of all home loan funding. The focus of their little-publicized reform
projects: the "overlay" rules many lenders have adopted that call for
extra fees, larger down payments and higher credit scores than Fannie,
Freddie or the FHA require.
For
example, Fannie and Freddie may accept FICO credit scores of 660 to
680, and the 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: The 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 the 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 the 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,
Chapelle says, 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 Assn., says
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 indemnification 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," O'Connor said.
FHA
lenders also want greater fairness in the way they're treated when
loans default, Chapelle said, 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, home buyers might see slightly less
punitive "overlay" fees and underwriting later in the year. Don't hold
your breath, but it could happen and it just might help you get approved
for a mortgage.
Distributed by Washington Post Writers Group.
Copyright © 2012, Los Angeles Times
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