Black Friday 2014 may be over, but holiday home shoppers still have something to look forward to in the form of less stringent mortgage standards. Although shopping for a mortgage may not be as exciting (or dangerous) as competing for that one 42-inch flat-screen TV remaining on the store shelf, the recent loosening of mortgage qualification guidelines is a gift that promises to keep on giving for homebuyers and the economy at large.
The new Fannie Mae and Freddie Mac standards, which lenders must adhere to in order to make their loans sellable to those agencies, began to loosen earlier this year, but the representations and warranties didn’t fully take effect until Dec. 1.
The biggest point of contention was when and how a lender would be penalized if it underwrote a loan that went sour. That stalemate was understandable. Inadequate underwriting resulted in tens of billions of dollars in loan buybacks and penalties to lenders. Tighter lending criteria were simply a precaution by the lending intuitions that felt the deep sting of what happens when credit is given too freely.
As the real estate market began to recover, lenders criticized Fannie Mae and Freddie Mac for their confusing credit standards, which often created a bottleneck between buyers (who wanted to purchase a home) and lenders (who added even more restrictions to mitigate the possibility that they could be on the hook for a loan gone bad). Lenders became hypersensitive to lending to anyone with less-than-perfect credit. In fact, they required more than Fannie Mae and Freddie Mac standards by requiring buyers to have much higher credit scores than those agencies outlined.
Looser credit standards
Easing credit standards may be just the boost to the housing market economists have been calling for, with the potential to convert hundreds of thousands of consumers into homeowners. Earlier this year, The Urban Institute projected that these changes could contribute 1.2 million new home loans if lending practices mirrored what is considered a “normal” credit standard.
Some lenders are embracing the updates and expect to shift their guidelines rather quickly. Wells Fargo recognized the changes coming down the pipeline and began lifting its own overlays earlier in 2014. With the formal changes now in place, Wells Fargo is saying that its applicants may see changes as soon as the next few weeks.
Faster turn times for a loan to be completed is one change that many borrowers will be elated to embrace. In some cases, it has taken up to 60 days for a loan to close from the time it was initiated. That has been frustrating to many home sellers, who would prefer to close in 30 to 45 days.
A reduction in paperwork is another positive change. Lenders had been requiring applicants to write letters of explanation for the smallest of things, like a late payment on a car loan. Even if the late payment had no ill effect on the actual loan approval, many lenders enforced the overlay simply because they were unsure whether the blemish could possibly cause a repurchase demand from Fannie Mae or Freddie Mac.
In other instances, credit scores had overlays. Even though Fannie and Freddie would back loans with a borrower at a 620 score, lenders sometimes required the applicant to have a 660 score or higher. Now, some lenders may become more lenient in their own requirement, with borrowers at the 620 mark no longer being disregarded.
Naughty or nice?
Even though some lenders are optimistic about the changes, others are taking a wait-and-see approach. Both Bank of America and US Bank’s key executives aren’t ready to widen their nets with looser standards, despite the fact that the collateral damage from litigation and a shifting regulatory environment has all but disappeared.
Regardless of your opinion, the statistics show the writing on the wall: The economy needs to see more homebuying activity to keep the U.S. economy moving toward a more robust recovery. Last week, the Case-Shiller Index reported that U.S. home prices grew less than 5 percent during the 12-month period ending in September — the slowest pace in 24 months.
For better or worse, loosening credit standards is a sign that the powers that be may be ready for lenders to get back to the business of lending. Lenders have been reined in and penalized enough to responsibly lend again without overzealous restrictions. Whether this is an overdue and prudent development in lending or a sign of looser standards to come will be something we’ll all be waiting to see.
What do you think? Do you think these changes will be enough to get buyers off the fence and out home shopping? What do you think will come from these new changes?
Tracy Royce is an Arizona short-sale Realtor, investor, rehabber and foreclosure expert.