So far 2014 has been an interesting year for the mortgage business. We are seeing approximately 60 percent less in refinancing originations. And while purchase mortgages (those originated when someone buys a home) have been steady, they are not taking place at the same blazing hot pace that we were seeing last year. It is for these reasons that we are hearing a lot of talk that Fannie Mae, Freddie Mac, and FHA may be lowering some of their credit standards to improve mortgage originations. Some lenders have already started lowering their credit score requirement for loans.
The criteria for mortgage approvals are given to lenders from Fannie Mae, Freddie Mac, and FHA, because lenders ultimately sell the majority of their closed loans to these government institutions. Most lenders then add a layer of padding to their rules, making it more difficult to get a mortgage. This helps them look more conservative to Fannie, Freddie and FHA and also reduces the risk that they will have to buy back any loans from them that go into default.
Lately, though, we are seeing quite a few lenders reduce their min credit score requirement for FHA (a loan that only requires 3.5 percent down) to 620 from 640. We are also seeing many lenders on the conventional side also reduce their credit scores to see if they can increase business.
I personally think this is a HUGE mistake. Credit scores are indicators of how likely it is that a borrower will default on a loan. The higher the score, the less like a borrower will default and as the score goes down the likelihood increases that a borrower will default. So with this simple safe guard put in why do we want to push the envelope in trying to increase originations? Could something like this lead to another real estate bubble? We are still recovering from the last one.
I have been in the mortgage industry for 23 years and I have seen firsthand what lenders and government agencies can do to increase business. I can remember down payments going from a min 10 percent down, to 5 percent then 3 percent and then 0 percent down. I can also clearly recall qualifying ratios for a loan being thrown out the window with “no income verification loans.” With these loans, what the borrower told a mortgage originator they were making was put on the application whether it was true or not. I can also remember lenders reducing their credit scores to help increase business.
Currently, what I am hearing from my real estate partners is that inventory is low and that is boosting prices. Lowering credit scores could only add more buyers to an already crowded market, which could lead to artificially inflated prices, which could lead to another real estate bubble and subsequent crash.
Lenders and government agencies should leave the criteria right where they are at and let the economy and jobs catch up. It will be better to let things work themselves out than to tempt disaster by creating artificial scarcity.
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