The Home Buyer's Korner

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October 28th, 2014

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It’s About Time for Declined Would-Be Home Buyers to Re-Apply

declinedThe housing market is about to ramp up. Prices are leveling off, homes have gotten cheaper and will be easier to qualify for in 2015. Even the job market is recovering and that equates to home ownership in America.  Yet the paradox is home sales are on pace to fall this year for the first time since 2010.

The torturous experience home buyers have had to endure for the last four years, but should be ending soon may help explain why.  In the past many home buyers with solid jobs, who got pre-qualified for a mortgage hit a brick wall when getting a lenders to approve their application. The one biggest complaint was endless rounds of paperwork and intense scrutiny from underwriters. To bolster their application, they paid off old student loans and beefed up their savings, only to miss their initial closing date and a number lost the house to another home buyer with all the lender delays.

Many would be home buyers got so frustrated they throw in the towel and found apartments to rent.  For those who were persistent, many eventually got their loan and closed. But their four-month ordeal highlights how federal rules put in place in 2010 so scaring banks away from all, but the safest would be home buyers and gumming up the process for everyone.

Federal regulators last week took their biggest steps yet to grease the wheels for would be home buyers, lowering down payment requirements on federally insured conventional mortgages to five percent and issuing new rules for what qualifies as a “Safe Loan”. Regulators have also promised we would so get clearer rules on when banks might be forced to buy back a defaulted loan after selling it to Fannie Mae or Freddie Mac.

New rules should strike the right balance on lending rules and breathe a little more life into the housing market and most of all it’s in the entire nation’s best interest to help more responsible Americans succeed in the housing market by expanding access to credit. Some believe that a few years ago, it was too easy to get a home loan and their solution unknowingly or not was to making it too hard.

The cautious climate of the last few years has all but shut out many would-be home buyers who suffered most in the housing crash.  Legislation like Dodd-Frank and new oversight from the Consumer Financial Protection Bureau have improved protections for home buyers, taxpayers and the economy overall, but there’s a lot of room between where we are today and where we were when Wall Street got us into this mess.  Prior to the mortgage meltdown the marketplace that was devoid of rules and standards, but we established those and figured out what works and what doesn’t. Many rules have been unclear, lenders say, which is why they’ve only been making bulletproof home loans.

David Stevens, president of the Mortgage Bankers Association put it best by saying, “the potential penalties aren’t worth the profits”. He points to so-called put-back rules — which federal regulators have pledged to clarify — that can force banks to buy back mortgages they’ve already sold off their books if regulators find even minor errors in loan documents that run hundreds of pages.  Steven further said, “On a $400,000 loan, a lender might net $1,500, but lenders can be on the hook for hundreds of thousands of dollars. It’s inconceivable.”

Fallout from all the vague rules have lenders fixated on credit scores. The average borrower getting a conventional mortgage today has a FICO score of about 740, as reported by CoreLogic. In the late 1990s and early 2000s, that number was in the mid-600s.  Unfortunately FICO scores has become a proxy for good sense underwriting and lenders have been using it to screen out all but the very best would-be home buyers, trading less volume for lower risk.

It easy to assume the home buyers with excellent credit scores will meet their mortgage obligations and there a lot less issues trying to sell them to Fannie Mae or Freddie Mac, but practice hurts far too many would-be home buyers and ultimately has be suppressing the nation’s economic recovery.

A study by the Urban Institute found that higher credit score requirements and extra rules blocked as many as 1.2 million home sales in 2012. That was about one in five potential purchases that would have created the need for things and ultimately jobs.  Yes, a robust housing market has always been the spark that created a recovery and you would have thought all those high powered politicians in Hollywood East and their friends on Wall Street would have known, but it has taken awhile for them to figure out what those of us lower down the totem pole always knew.  Main Street is what make America move and we aren’t perfect paper cut outs with 740 FICO scores.

A hard cutoff like that is just too tough, There’s typically a reason why someone has a credit score in the mid-600s or lower — maybe a foreclosure, short sale or a job loss that got them overextended on credit cards, but many were well in the past now and it’s time for real change.

In today world it’s not uncommon to have a 590 credit score due to a five year-old incident. Anyone who hasn’t had any bad credit since learned their lesson and should be a good credit risk, but when you just look at number good families who should own homes that don’t.

It’s a fine line between removing needless barriers and using public policy to push home ownership. Through much of the 1990s and 2000s, both Democratic and Republican administrations worked to expand home ownership, pushing the nation’s rate to a high of 69% in 2004 right before the crash. Today, homeownership is below 65%, a 19-year low.  Unfortunately we didn’t really create homeownership, but rather transitory home ownership and speculation that ended in serious hard times for millions of people.”

With the new commitments coming for FHFA that oversee Fannie Mae and Freddie Mae we hopefully will get back to good underwriting, which means actually reviewing and applications in depth to analyze the difference between real risks and a borrower’s one-time mistake.

The transition won’t happen overnight.  When lenders get accustomed to serving home buyers with 700 credit scores and then they get one at 620, many aren’t going to know what to do. There’s been so much reliance on FICO scores and automation that the industry has gotten weak with its ability to analyze credit, but at least there’s a change in the wind and this blogger believes things are about to change.  But, before you re-apply take a little time to get prepared and read our other post about “buying smart”.  Many properties are available you might not consider dream homes at first look, but many are and you could learn about hidden treasures right in front of you.  


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