Feb172015

Lender offers FHA loans with no FICO score requirement

Underwriting loans to unqualified borrowers with super-low FICO scores is a recipe for another crisis of loan delinquencies and foreclosures.

everyone-qualifies-low-barMany have quipped that FHA has become the replacement for subprime because they have very low standards for qualification, a very low down payment requirement (currently 3.5%), and as a result, they have become the loan-of-necessity for anyone who doesn’t have the credit requirements or the down payment necessary to obtain other financing. In other words, they have stepped into the void left by the collapse of subprime lending.

I recently reported that the FHA reduced it’s insurance fees to spur first-time homebuying; this move came despite the fact the fund maintains reserves far below it’s mandate. Many Congressional Republicans worry issuing more FHA loans to marginally qualified borrowers puts the US taxpayer at risk — which it does.

Are the Congressional Republicans merely grandstanding for votes? Are they being alarmist when no real danger exists? Is the lowering of FHA loan fees and lowering of lending standards really a problem?

Reducing lending standards while also reducing insurance fees is a recipe for a future bailout. Lower lending standards puts more unqualified borrowers into homes with low-down payment mortgages. When these borrowers default, the default losses will be large, and the US taxpayer will be left holding the bag.

So are lenders really letting unqualified borrowers buy homes again?

Yes, they are….

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South Pacific Financial Corporation announces no minimum FICO score on all FHA-approved loans

This change will be effective on all FHA loans underwritten on or after January 20, 2015

IRVINE, Calif., Jan. 20, 2015 /PRNewswire/ — South Pacific Financial Corporation (SPFC) has announced a credit enhancement to its Federal Housing Administration (FHA) guidelines. Effective January 20, 2015, there will be no minimum FICO score necessary with loans that meet FHA system approval.

No minimum FICO score? Yes, you read that properly — no minimum FICO score.want_a_house

Apparently, the lender believes the other standards of the FHA system approval will weed out unqualified borrowers, but since the FHA system is subject to change based on shifts in the political wind in Washington (as evidenced by the recent reduction in FHA insurance fees), I have no confidence whatsoever in the FHA system’s ability to prevent unqualified borrowers from getting government-backed loans.

As long as a borrower receives an automatic approval through the FHA’s automated underwriting system, there’s no FICO score requirement,” said Michelle Millwood, AVP Underwriting Manager at SPFC, and a member of the team that helped develop the new product guidelines.

This program brings a great deal of relief for the most underserved of all borrowers — those currently with FICO scores below 620,” said SPFC CEO John Johnston.

So are you excited about your tax money backing mortgage loans to borrowers with FICO scores under 620? I’m positively giddy… not.

“We’re excited to launch this new program knowing most lenders want to see a credit score of 620 or higher on their FHA loans. Not so at SPFC.”

no-house-for-youWhat’s wrong with saying no to borrowers who can’t reliably make payments and sustain home ownership? Based on the poor results from the subprime experiment from 1995 to 2007, I think it’s more emotionally traumatic to put people in houses when they can’t sustain ownership than to simply deny them the illusion of ownership in the first place. It upsets people far less to be turned down for a home loan than it does to endure a foreclosure.

Giving the housing market a much-needed boost

“This is something much needed in the housing marketplace,” said Dan Manginelli, SPFC Executive Vice President. “I think we’re opening up a lot of possibilities for borrowers who may have had some hiccups in their past.

Hiccups? Is that the new euphemism for delinquency and foreclosure?

Many borrowers from the housing bubble lied on their loan applications, borrowed money they couldn’t possibly repay unless house prices went up, gamed the system to squat for years after they quit paying, and we’re supposed to forget about all that and forgive their little hiccup?

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Let’s overlook the past behavior from more than 8 years ago. Realistically, any mistakes borrowers made during the housing bubble are long behind them, and if they learned anything from the experience and reformed their profligate ways, then over the last few years their good behavior would be reflected in a higher FICO score.

Giving loans to people with FICO scores under 620 isn’t about forgiving a hiccup from the past, it’s giving a loan to someone who demonstrates current irresponsibility with money. Why do we want to see that happen, particularly with government backing?mobile_ATM

And though they’ve gotten past that, their credit scores don’t reflect that yet. This new program is here to help them.”

Why wouldn’t their FICO score reflect that yet? And why can’t they wait until it does?

How underserved is the market for those seeking to purchase a home with a FICO score of less than 620? Fannie Mae says loans with a FICO score of less than 620 currently account for only 1% of its business.

The numbers at Freddie Mac are slightly higher. As of December 2014, about 3% of its single-family portfolio had a FICO score of less than 620. Conversely, those with a higher FICO score above 700 accounted for 78%.

This is evidence of a return to prudent lending standards after the complete abdication of lending standards exhibited during the housing bubble.qualifed

Data shows FICO requirements trending even higher

As if the headwinds weren’t strong enough, recent trends show FICO scores are inching upward.

According to a recent NAR survey, the market for borrowers with FICOs between 620 and 720 shrank from 95.7% to 80% and the willingness to lend to this group declined by 15%.

Considering that group is far more likely to default on the mortgage, not lending to them is a wise precaution, don’t you think?

The median FICO score for FHA loans has been rounding up as well. According to a recent Mortgage News Daily article the FHA’s median FICO score at origination has climbed from 645 in 2007 to its current level at 684.

Given this lending environment, first-time homebuyers are feeling the crunch. According to NAR’s 2014 Profile of Home Buyers and Sellers, the share of first-time buyers fell from 38% in 2013 to 33% in 2014. That’s the lowest level in 27 years.

“This makes for a tough lending environment, especially when you consider that more than a third of all consumers have FICO scores below 650,” said Johnston. “Many of those are being left out of the current housing market. We’re here to help turn that around.”

This is exactly what the housing market doesn’t need. We will merely inflate another home ownership bubble and disappoint another generation of would-be homeowners.

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