“FHA Wants Credit Scores Relaxed” “Stop and Think About Why?”
For over two years, many of us in the mortgage and real estate business have been saying, that to get more folks into homes, credit scores need to be lowered and regulations relaxed.
For nearly two years FHA has been saying they want to slow down the number of loans that they do. Guess what, they got their wish.
Now they say, we are not doing enough loans and that more lenders need to offer FHA loans at lower credit scores. There are a couple of reasons. First, there are about 10,000 homes per month being foreclosed. Guess what, they want to sell them. Second, they raised their fees and will be doing so again, probably April 1st. Rather than another bailout, that has been talked about for the last 6 months, the current administration knows how that would play out all too well. So, what to do, lower credit scores and do a lot more loans and no bailout is necessary.
By the way, the article below talks about “Neighborhood Watch”, every lender and mortgage company has a rating. Our company rating is 62, which means some of the lowest default numbers in the country. That being said, even for mortgages that we did for clients with lower credit scores, we still have an outstanding rating.
FHA Wants Lenders to Relax Credit Scores
By Brian Collins
Federal Housing Administration loans once served a broad spectrum of borrowers until the subprime mortgage meltdown came along and pushed lenders to tighten underwriting standards and credit score requirements.
Today, the average credit score on an FHA-insured mortgage is 700.
The Department of Housing and Urban Development would like to see FHA lenders relax their credit score minimums allowing more borrowers to qualify for FHA loans. But lenders are telling HUD officials the agency must first change FHA's lender/monitoring system known as Neighborhood Watch so they aren't stigmatized for making loans to borrowers with lower credit scores.
Lenders are urging FHA officials to change the system so performance comparisons are made with loans with similar credit scores and risk characteristics, according to FHA consultant Brian Chappelle.
Currently a lender's performance is compared to the average default rate for all FHA loans. "I know they are considering options to change Neighborhood Watch,” he said. "And they know the implications of the issue." Chappelle is a co-founder of Potomac Partners in Washington.
The Neighborhood Watch system tracks early defaults for each lender. FHA lenders with above average default and claim rates are placed on a watch list of sorts.
Every FHA lender -- large and small -- keeps an eye on their Neighborhood Watch ratio as do their counterparties, including warehouse lenders.
A very high default and claim rate can trigger audits by FHA or the HUD Inspector General. These audits often lead to indemnification demands for actual and future loan losses.
As a result, FHA lenders are more comfortable catering to borrowers with higher credit scores.
"We are aware of some lenders' concerns with particular aspects of FHA's compare ratio," said HUD spokesman Lemar Wooley. "We are taking those comments into consideration as we continually evaluate our policies and procedures for evaluating counterparty risk to FHA.”
Mortgage Bankers Association president and chief executive David Stevens noted that access to credit is an important consideration as the market recovers. "If the secretary of HUD and the administration wants to encourage lenders to use the full breadth of the FHA credit box -- they have to address the compare ratios," Stevens told National Mortgage News.
The former FHA commissioner noted, however, that changing Neighborhood Watch could create other distortions in the market. FHA, he said, does not want lenders “who just target the low end of the credit score box," Stevens said.
Neighborhood Watch was developed in the 1990s to protect low-and moderate-income communities from predatory FHA lenders.
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Joe Petrowsky, NMLS #6869
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