Mortgage Lenders are Insisting on High Credit Scores

Lorraine Woellert, Bloomberg News, June 29th, 2012
Lenders are requiring the highest credit scores in at least a decade to approve home mortgages as loan officers report that pending regulations prompt them to continue limiting risk as the economy recovers.
The BGOV Barometer shows the credit scores of borrowers approved for home purchase loans averaged 737 last year — the highest in records going back to 2000 — and held near there in the first two months of 2012, according to figures from CoreLogicInc., a mortgage data and software company in Santa Ana, Calif.
The current median score, or midpoint score, for all consumers is 711, which is down from 723 in 2006, according to Fair Isaac Corp., a Minneapolis company that developed the rating system, called FICO scoring.  Borrowers are ranked on a scale of 300 to 850, with those in the high range having a lower risk of default.
Getting a home loan has gotten more difficult even as credit cards, car loans, and business financing have become easier to obtain, according to a Federal Reserve survey in April of senior loan officers.  Even after mortgage rates dropped to historic lows and depressed prices make houses more affordable, there may not be enough credit available to fuel a sustained housing rebound.
“The car should start, but it won’t,” said David Crowe, chief economist of the National Association of Homebuilders.  “No matter how low rates are, if people can’t get a mortgage, we’re not going to stimulate the housing market.”
Lenders quickly tightened mortgage standards in 2008 after the subprime collapse left them with millions of defaults on overvalued houses.  Now, they are getting even more selective out of concern that pending regulations, supervisory oversight, and the still-uncertain future of housing finance could expose them to new risks, according to bankers and analysts.
Seven out of every 10 banks in the Fed survey blamed Washington for their reluctance to lend.  Pending consumer protection rules on mortgages, passed two years ago as part of the Dodd-Frank Act, could expose banks to penalties.  Another provision could raise the cost of selling mortgages into the bond market.
About 82% of the respondents to the Fed’s survey also said they were worried about aggressive policing by Fannie Mae and Freddie Mac, which own or guarantee almost two-thirds of home loans.  Minor underwriting errors on even seasoned loans and newer, less-risky products are triggering demands that lenders buy back mortgages they’ve sold to the government-sponsored entities.
The tightening caused by the regulatory environment “is becoming dangerously unhealthy,” said Bill Cosgrove chief executive of Union National Mortgage Co., based in Strongsville, Ohio.  “The bucket of acceptable loans is shrinking.”
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