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Tougher Standards, Tighter Credit

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November 17, 2010 – Comments (3)

Well worth the read, this article talks about the higher standards banks are now imposing on FHA loans:

http://www.bloomberg.com/news/2010-11-17/home-ownership-gets-harder-for-americans-as-lenders-restrict-fha-mortgages.html?cmpid=yhoo

Some excerpts:

"Mortgage lenders including Wells Fargo & Co. and Bank of America Corp., the two largest, have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings."

Hey at least they are raising the standards. Wasn't part of the problem that loans were being given to borrowers who didn't really qualify in the first place?  

“We’ve gone from silly to stupid,” Phipps, principal partner of Phipps Realty Inc., said in a telephone interview from his home in Warwick, Rhode Island. “People who should be getting credit can’t get it. To have a healthy real estate market, you need activity. You need transactions.”

True to an extent, but not activity for activity's sake. Crappy lending practices still beget crappy results. Getting credit is tougher...it should be. We are paying the price now...no free lunch.

"Mortgage companies are tightening FHA standards partly because of the higher costs they face in servicing delinquent loans, said Luke Hayden, president of the mortgage unit of Mount Laurel, New Jersey-based PHH Corp. By keeping defaults low, they can also boost the prices they fetch for bonds filled with the loans and thus offer lower rates, he said.

When FHA-backed loans go into default, the lender bears a greater share of the expenses than when the mortgage is backed by Fannie Mae and Freddie Mac, Hayden said. That’s one reason why the banks impose their own, higher standards on the loans."

Makes perfect sense. Lenders should bear responsibility for the loans they originate and/or purchase. Granted I don't see how rates can go much lower than they are now, but even in a higher rate environment this makes sense. Lends itself to why Fannie and Freddie are the dysfunctional and useless entities that they are today. Something goes wrong, eh, just let the government (aka taxpayers) take care of it.

"FHA lending to the riskiest borrowers has declined in the past two years. Only 3.8 percent of FHA loans had scores below 620 or no score in the quarter ended Sept. 30, down from a peak of 50.4 percent in the period through Dec. 31, 2008, according to a Nov. 4 agency report to Congress. A score below 620 was typically considered subprime before the credit crisis, meaning the borrower had a bad or limited credit history."  

All I can say is thank goodness it has declined. I mean 50.4%?! That is utterly insane. The FHA is supposed to help those worthy in attaining the responsibility of homeownership. The problem here is that too many people think that homeownership is a right. It is not a right. It is a responsibility, and one which many don't even come close to qualifying for (I think this point has been proven). The FHA (and the banks in turn) should have never let these standards get so out of hand in the first place. Shame on all of 'em.

Foolishly,

Jason

TMF Rising Stars

3 Comments – Post Your Own

#1) On November 17, 2010 at 1:15 PM, leohaas (32.13) wrote:

640 is still way too low. Assuming a 10-year credit history, it implies at least one unpaid balance that the score owner refuses to pay, plus a few late payments on credit cards or mortgages. Who would want to service a loan for people who are that irresponsible?

Just paying what you owe when you owe it for 10 years will get you to 780, even if you use credit sparingly. Use those 10 years to save for a 20% down payment, and you can buy a house. Why is that so difficult to get?

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#2) On November 17, 2010 at 1:54 PM, TMFJMo (68.97) wrote:

Couldn't agree more leohass. I haven't done anything out of the ordinary in my life with bills other than pay them on time and my credit score is above 800. If I am going to service loans for questionable payors, I want to be compensated for it. Even then, I don't wanna deal.

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#3) On November 17, 2010 at 1:54 PM, TMFJMo (68.97) wrote:

Couldn't agree more leohass. I haven't done anything out of the ordinary in my life with bills other than pay them on time and my credit score is above 800. If I am going to service loans for questionable payors, I want to be compensated for it. Even then, I don't wanna deal.

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