Politics & MoneyMortgage

Has the credit restriction pendulum swung too far?

BPC Summit: Balance has to be struck and right now it’s off kilter

Current rules and practices regarding credit boxes for both underserved and middle class borrowers have to be reformed, according to several of the leading voices speaking at the Bipartisan Policy Center Housing Commission’s regional forum being held Thursday in Sun Valley, Idaho.

HousingWire is the BPC’s media partner in the mortgage finance trade. The two organizations are joining forces to promote and cover the BPC Housing Commission’s upcoming Housing America’s Future: 2014 Housing Summit next month in Washington D.C.

Housing leaders including outgoing Federal Housing Administration Commissioner Carol Galante; Republican Senators Mike Crapo and James Risch; former Senators Mel Martinez and Kit Bond, and former Clinton administration HUD Secretary Henry Cisneros, led the discussion, with many mentioning the challenge of balancing opening access to credit and not getting into the quicksand of easy credit seen a decade ago. 

In the aftermath of the housing crisis, rules were tightened and some say too much. While the Dodd-Frank rules were written with good intent, bankers can’t use good judgment and instead rely on strict rules and algorithms that shut out those on the margin and many in the middle class with good but not pristine credit.

The Federal Housing Finance Agency is already looking at ways to open credit responsibly to lower income and less pristine borrowers.

Crapo said that the lack of GSE reform – discussed here – along with the restrictions from the Qualified Mortgage rule and other credit squeezes is keeping first time buyers out of the purchasing market and in some ways, private capital out of the mortgage market.

“Private capital is on the sidelines. Not seeing the robust investment of capital in housing that should be. Huge issue in terms of what could be lost if we stay with the status quo,” he told HousingWire. “I don’t think the status quo will bring back private capital, and we’ll continue to have political warfare over it. We’re spinning all four wheels and going nowhere.”

Galante told HousingWire that the most important agenda for FHA moving forward is this blueprint for lenders so that they have confidence and can remove some of their credit overlays and lend to a broader credit box for FHA loans.

Martinez said that while finding the right balance between restricting credit too much and returning to the days of mortgages being approved because an applicant has a pulse, the real problem facing housing – especially the challenge for first-time buyers – is better job creation.

“There are several factors such as availability and accessibility of credit but this really relates to the employment situation. While it improves the numbers of what people are earnings is not what is traditionally seen,” he said. “People can’t save for a down payment or get their FICO score as pristine as lenders would like if they can’t get better jobs.”

Cisneros said credit availability has gotten too tight.

“Between affordable housing goals and tightening lending and mortgage standards:

There is no easy answer. We know that the pendulum has swung too far in restrictiveness. We have too many people who ought to be eligible for homeownership and the benefits of homeownership who aren’t because of restrictions on lending. That shuts them out of the benefits of homeownership – it’s the building block of building net worth and assets, and a pathway to the middle class,” Cisneros told HousingWire.

The Qualified Mortgage rule has definitely put the squeeze on would-be homebuyers seeking a mortgage. People with lower income, the self-employed, those with credit scores on the margin, and people whose income comes from tips, bonuses or other harder to document sources are definitely being are all facing an uphill battle.

Industry analysts say that anywhere from 10% on the low side to 20% on the high side of people who have a mortgage now would not qualify for a mortgage under today’s rules.

But the rules and standards for getting a mortgage were already tightening long before the CFPB put their screws to it. In fact, the industry had largely self-corrected – as if it had a choice – long before Washington put it in ink with heightened documentation and tighter standards.

Mortgage applications, the first step in the mortgage process, have been down this year almost consistently.

Analysts with Goldman Sachs [GS] say that at least one of the reasons is persistently tight mortgage lending standards.

“After the housing crisis, lenders tightened mortgage credit and the tightening was particularly pronounced for those with low FICO scores. Surveys conducted by the New York Fed show that an increasing number of low-FICO borrowers do not apply for mortgages for fear of being rejected,” Goldman’s analysts note. “Because low-FICO homebuyers are more likely to rely on mortgages to finance home purchases, an increasing number of discouraged low-FICO borrowers contributes to elevated cash transactions. In other words, persistently tight credit supply over the past few years may have begun to depress mortgage demand, resulting in a sustained gap between home sales and purchase mortgage applications.”

Essentially, there needs to be more flexibility to exercise good judgment, Cisneros said.

“Yes, we need safeguards, we need good judgment in lending standards on who can afford homeownership, but we are wrong to shut so many out of the path to the middle class with the restrictions and standards we have now,” Cisneros said.

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