Since the financial crisis, qualifying for a mortgage has become difficult for people with anything short of perfect credit. The Urban Institute’s Housing Credit Availability Index stands at 5.9 percent in the first quarter of 2018, less than half its level in 2001, a period of reasonable credit standards.
We have estimated that because of high credit standards, as many as 1.1 million fewer loans were made in 2015 than would have been made if the more reasonable 2001 credit standards had been in effect. Since 2009, 6.3 million fewer loans have been made.
Credit is tight in large part because lenders are imposing standards more stringent than those required by the entities that guarantee or insure these loans: the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and the Federal Housing Administration (FHA). For example, the FHA may be willing to underwrite a mortgage with a FICO credit score of 620, but the originator might require a 660 FICO score.
Originators knowingly drive away business because they are concerned that the costs of producing and servicing a less-than-pristine mortgage are higher than what they can earn on the mortgage. These concerns come from three sources:
- Representations and warranties (the risk that the loans will be put back to the originator by the guarantor or insurer)
- Litigation risk (particularly the use of the False Claims Act)
- High and uncertain costs of servicing delinquent loans
The GSEs and their regulator, the Federal Housing Finance Agency, have been more successful than the FHA in addressing this issue by reassuring lenders that they will be liable only for errors in underwriting the loans and not for borrower defaults. Between 2012 and 2016, the GSEs removed many obstacles that have caused lenders to impose more stringent standards or “overlays.”
But credit availability is still limited because of the FHA, which has historically insured borrowers with less-than-pristine credit.
Accordingly, one of the most important steps to expand credit availability is for the FHA to give lenders greater assurance that they are only liable for their own errors, not subsequent performance.