Mortgage lenders are overly restricting credit as a shield from the threat of put-back risk on loans sold to government-sponsored enterprises, Federal Reserve board member Elizabeth Duke suggested Tuesday.
While speaking to the National Association of Realtors in Washington, Duke said lenders surveyed said they are less likely to originate loans to GSE borrowers with credit scores under 620 even if the borrowers make a 20% down payment.
In addition, she said, the only borrower category not to experience a reduction in the types of credit made available to them are borrowers with credit scores of at least 720 who made 20% down payments.
Duke said 80% of lenders surveyed cited borrowers difficulty in obtaining private mortgage insurance as a restriction on lending as well as fears that even the slightest error on a loan during underwriting can put them on the hook for a put-back of the loan later on.
"The ability of the GSEs to put back loans when lenders have misrepresented their riskiness helps protect taxpayers from losses; however, if lenders perceive that minor errors can result in significant losses from put-back loans, they may respond by being more conservative in originating those loans," Duke said.
She explained that lenders' fears in the current regulatory environment combined with borrowers' concerns over falling home prices have resulted in lower demand and tighter lending.
As far as lenders slowing their activity levels over put-back risks, Duke is hopeful technology can be used to improve the risk-assessment process to loosen fears over put-back risk.
"If technology and data standardization can be used to enhance quality control reviews at the time of purchase rather than after the loans became delinquent, it would allow errors to be corrected much earlier, and thus should result in better outcomes for taxpayers, borrowers, investors and lenders," Duke said.