At a time when we need home prices to stabilize, access to the mortgage pipeline is being excessively constrained by absurdly high borrower credit requirements, diminishing credit scores resulting from lender imposed credit limit reductions, and understaffed Lenders hamstrung by top-down, inept bureaucracies.
Because of the credit crisis, Mortgage Lenders have closed their purse to all but the best borrowers with impossibly high credit scores. Most Conventional loans today require a credit score of 740 or higher. During the 1980's and 1990's, before sub-prime loans were commoditized, and before we shifted wholesale from "rules based lending to "risk" based lending, the minimum credit score was in the vicinity of 620. The difference being that, using the current 740+ credit score borrowers cannot spend more than 45% of their monthly gross income on housing plus long term debts whereas, in the past, a credit score of 620+ was sufficient, but the maximum debt ratio could not exceed first 36% and later 38%. During this period the foreclosure rate was relatively stable, and within an acceptable risk/ reward level, which made Fannie Mae and Freddie-Mac mortgage backed securities, a relatively safe bet for investors. It was so successful that Wall Street created knock-off models which originally succeeded and gradually morphed into the sub-prime debacle by reducing the borrower's qualifying requirements to "is breathing". If we are going to get mortgage lending up to a sufficient level to absorb the vast excess inventory of foreclosed and short sale properties and stabilize the market, we need broaden our definition of credit-worthy borrowers back to those used by Fannie and Freddie successfully for decades. We should consider offering a 2 tier program. For borrowers with credit scores at or above 740 we can leave the borrowing ratio at 45%. For borrowers below 740, but above 620, we should reduce the borrowing ratio back to 36% or 38%.
Credit scores are, in part, determined based on a borrower's debt ratios. With lenders reducing borrowers credit limits on credit cards, equity lines, and other lines of credit, borrower's debt ratios are being adversely affected. A borrower, who has a credit score of 740+ carrying unpaid credit card balance of $2,500 on a $10,000 card limit on a Monday, may find their score adversely affected by Tuesday when their credit card company implements a reduction of their credit limit from $10,000 to $5,000. Hence, borrower's credit scores are being lowered at the same time higher scores are being required for mortgage loans.
This year there are significantly fewer mortgage lending institutions than there were a year ago. Bank of America, Citi, Wells Fargo and Chase "The Big -4", now dominate the market with their stifling bureaucracies, and rigid lending requirements. Having still too many bad mortgage-backed-securities on their books, they are excessively limiting mortgage lending, and do not see the competitive advantage of offering such innovations such as the two-tier solution I have suggested above. Chase recently announced they would no longer fund loans originated by independent mortgage brokers thereby effectively further consolidating the mortgage lending industry. Bloated with recent acquisitions of companies like Countrywide and Wa-Mu, the "Big 4" are simultaneously ‘too big to fail" and "too-bureaucratic" to function efficiently. In the downturn these large institutions laid-off, wholesale, their mortgage lending staffs loan officers and processors. A friend "Mr. C", who works as a loan officer for one of the "Big-4" was, until recently, the sole occupant in a 10,000 square foot downtown office space. The desk drawers were still full of the personal minutia, nail clippers, favorite pens and the abandoned files, of a long departed staff. Recently he moved to an office with 3 other loan officers and a similar dearth of staff and excess of unoccupied, cluttered desks. His new office had no printer. This past week for perhaps the 4th time in 5 months, the Company announced changes in how they propose to do business, and still these changes are not for the better for the borrowing public at large. After the call one of his fellow loan officers commented, that as far as mortgage rates were concerned, they were instituting Neiman Marcus pricing. Let's hope the other 3 do not follow suit.
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