Will qualified homebuyers who have credit scores below 620 be able to get an FHA mortgage in 2012? Or are many lenders still maintaining arbitrary FICO cutoff scores of 620 to 640, despite the fact that FHA itself accepts scores down to 500?
These are important, ongoing questions at HUD, where acting FHA commissioner Carol Galante told me last week that "we remain concerned that some lenders" are rejecting applicants "solely on the basis of (their) credit score," which has the potential to violate the federal Fair Housing Act.
Meanwhile, HUD’s equal opportunity enforcement office is continuing investigations of 23 lenders’ underwriting practices to determine whether they give applicants for FHA loans a fair shot, even if their FICO scores are low. Though officials say they can’t discuss individual cases or negotiations, industry sources report that some are moving toward settlement agreements with HUD while a handful of others may end up at the Justice Department for further legal action.
The complaints were filed by the National Community Reinvestment Coalition, a consumer group that conducted shopper tests designed to expose how FICO score cutoffs higher than FHA’s own minimum disproportionately harm otherwise-qualified moderate income and minority homebuyers.
The FICO cutoff issue has been simmering for the past 12 months, ever since then-Commissioner David H. Stevens began jawboning lenders to allow more flexibility on applications from buyers and refinancers who can handle mortgage payments but whose FICOs have been depressed by recession-related problems such as temporary unemployment.
Last December, Stevens, who has since moved on to become chief executive of the Mortgage Bankers Association, sent out a memo to all FHA-approved lenders urging them to "consider all the factors (needed) to determine (a) borrower’s ability to repay their mortgage and look beyond a simple credit score."
Stevens’ memo helped change the practices — at least for awhile — at several of the agency’s largest mortgage partners. For example, both Wells Fargo — the No. 1 FHA originator, and Quicken Loans, the third largest — confirmed early in 2011 that they would be open to applications with FICOs below 600, provided there was sufficiently strong documentation that the borrowers had the financial wherewithal to pay their mortgage bills on time.
Wells Fargo said it would consider applications with scores down to FHA’s rock bottom of 500. Quicken sets its general cutoff floor at 580.
I recently followed up with executives at both companies to see how their policy changes were working out. The differences could not have been more stark.
According to Franklin Codel, Wells Fargo’s executive vice president and head of mortgage production, the company abandoned its sub-600 FHA "pilot program" two months ago because "we found that we were taking thousands of applications in this bucket but only finding a small number" that actually fit the bank’s funding criteria.
Leaving the door open to low-FICO applicants at the retail window "gave false hopes to people," he said in an interview. "More (applicants) got declined than ever before," while consuming "tremendous amounts of internal resources" and staff time to manually evaluate applications.
Only about 3 percent of all low-FICO borrowers ultimately were approved during the 10 months the revised policy was in effect. Codel estimated that 25 percent of borrowers in the 500s goes delinquent — a figure that is too high for FHA and Wells Fargo, and does consumers no benefit, he believes.
Wells Fargo has now moved its general FICO score minimum for FHA in its retail channel to 600, where homebuyers have a better chance of being approved. On a case-by-case basis, Codel said, "we will still look at" certain sub-600 score applications, but the prior policy of inviting applications from buyers and refinancers down to 500 FICO is finished.
Contrast Wells Fargo’s experience with Quicken’s. According to Bob Walters, Quicken’s chief economist, the company has "been writing (FHA) loans (down to 580) all year," and the borrowers’ performances so far "have exceeded our expectations." Not one of the nearly 1,000 mortgages closed to date has gone seriously delinquent, which means 90 days or more behind on payments.
From the start, Quicken imposed strict requirements on its sub-600 applicants, ranging from an absolute limit on total debt-to-income of 41 percent; no 60-day-late payments on any credit obligations during the last 12 months and no more than one 30-day-late payment; and that at least 3.5 percent of the borrower’s own documented cash go into the transaction, exclusive of gifts. Prior to the change, Quicken’s minimum FICO score had been in the 620 to 640 range.
Walters says that going to 580 FICO with relatively conservative underwriting overlays "proves that your credit score" alone shouldn’t be the make-or-break criterion for any applicant to get in the door.
David Berenbaum, chief program officer for the National Community Reinvestment Coalition, says the complaints filed with HUD, along with ongoing "discussions" the group is having with other lenders who have not been the subject of complaints, "are encouraging" for first-time and moderate-income buyers heading into 2012.
Berenbaum believes most lenders "are getting the message" that arbitrary score cutoffs on FHA loans are unfair and discriminatory, and may subject them to serious legal actions — litigation in federal court — in coming months.
"We are watching," he said. And so are HUD and the Justice Department.