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Secretary of HUD, Julian Castro, Challenges Stringent Requirements Among Lenders and the FHA.

Secretary of HUD, Julian Castro, Challenges Stringent Requirements Among Lenders and the FHA.  Castro called for substantial responsible change to get the housing market back on track, and approve more borrowers for homeownership.

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DSC_0665Orange, CA – Wednesday, September 24th, 2014 – In a speech on September 16th, 2014, the new Secretary of the Department of Housing and Urban Development (HUD), Julian Castro stated that lending standards have become too tight, and asked for changes to be made that would allow homeownership to be more readily available to prospective borrowers.   “I believe controls have been put in place on both sides – on the lender’s side and on the public’s side – since then, and that the pendulum has just swung too far in the other direction”, Castro stated.  Here Castro is referring to the fact that lenders have been extremely strict in adhering to guidelines out of fear of having to buy back mortgage loans, and prospective homebuyers have simultaneously been rather pessimistic since the recession, which is reflected in the (low) rate of mortgage loan originations being made.  On both fronts, buyer and lender, originations have stalled.

National Mortgage News cites Castro saying,

“Current credit overlays are not only stricter than they were pre-crisis, but are tighter than they were 15 or more years ago.  ‘The issue is how do we achieve a balance?  How do we ensure that the lessons that we learned over the last few years are utilized so that…folks that have demonstrated a decent track record and who in normal times would get a loan are able to do that?  There are millions and millions of Americans who fall into that category who right now don’t have access to credit and we want to change that in a responsible way’” (2014).

Credit scores significantly weigh into the decision of whether a prospective borrower is approved for a mortgage.  The Los Angeles Times notes that the average credit scores for approved mortgage loan applicants are much higher than historical norms, and “represent a high hurdle for many would-be purchasers –especially first-time, minority, and moderate income buyers”(2014).  LA Times also cited mortgage industry veteran, founder and chairman of America’s Homeowner Alliance stating that the current credit score levels of approved prospective homebuyers are “’serious’ contributors to a national problem:  ‘Homeownership is now at 64.8%, its lowest level since 1995, in part because so many consumers can’t get past lenders’ severe underwriting tests.  The ownership rate for Americans under 35 is 36.2%, the lowest on record.  ‘There are lots of people out there who are creditworthy and should be eligible’ to buy a home’, Bracken says.  Scores are not the only obstacle in their way, but they play a powerful role” (2014).  America’s Homeowner Alliance is a nonprofit group that promotes affordable housing for the average American.

It is apparent that the country’s major credit score model developers, FICO and VantageScore Solutions believe that this is an issue that banks could do a better job of combatting.  The developers noted that if the banks relaxed their scoring requirements from the current patterns, they could produce a higher volume of loans, drive the housing market, stimulate employment, and thus reduce risk as an increase in volume would reduce loss if the borrower were to default (The Los Angeles Times, 2014).  FICO specifically has tried to boost the housing industry by introducing FICO 9 which does not dock as many points for collection accounts and none for medical collection accounts (Broadview Mortgage Orange, 2014).  The New York Times noted that some lenders are still using old versions of credit scores because Fannie Mae and Freddie Mac use said scores in their underwriting software (2014).  When asked, “Fannie and Freddie did not say whether they had plans to switch to the updated FICO score that weighs medical collections less heavily.  But they both said they were confident in the tools they use”  (The New York Times, 2014).

Whatever Fannie Mae and Freddie Mac says goes, because lenders fear that mortgage giants will force them to buy back their loans if they possess below-par scores or underwriting.  The Los Angeles Times confirmed that “both companies have required lenders to re-purchase billions of dollars  worth of defective mortgages.  In the process, they’ve made banks and mortgage companies hyper-obsessive about delivering pristine loans” (2014).   Some banks and mortgage companies simply cannot afford the risk of coloring outside of the Fannie and Freddie lines.   The Los Angeles Times also noted that Mel Watt, director of the Federal Housing Finance Agency (FHFA) has tried to alleviate this issue by working with lenders and asked their advice on where to set fees charged by Fannie and Freddie, including that of borrower credit scores.  This is significant as the FHFA oversees Fannie and Freddie.

Broadview Mortgage values the opportunity to educate consumers to understand which direction that their current or future mortgage is taking them in.  If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams@broadviewmortgage.com .  If you would like a quick pre-approval click here, and for assistance with down payment or buyer assistance, click here.  You are also always free to give us a call toll free at (855) 692-7623.

Since 1988, Broadview Mortgage has distinguished itself through honest business relationships with clients, loyalty to employees, and commitment to empowering and educating those communities.  Broadview Mortgage is a mortgage banker and direct lender made up of loan officers with years of experience in the firm and sheer excellence in customer service. The firm works to explore several financial solutions from which it’s clients may choose.  Business is initiated and conducted on a word-of-mouth basis.  Broadview Mortgage is a delegated underwriter for the Federal Housing Administration (FHA), the Veterans Administration (VA), and the Federal National Mortgage Association (FNMA).  Broadview is also approved to participate in several state, county and city programs for First Time Home Buyers.

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