Lenders who responded to the 3rd Quarter Survey of Mortgage Originators indicated that proposed changes by the FHA may cause them to tighten their credit standards modestly. While this change is unfortunate, it would be a mild reversion to what is already a tight credit environment. These changes are not likely to affect the FHA’s profitability, nor will it impact the market as demand is currently strong relative to supply, but it does limit opportunities for first-time, boomerang, and credit impaired homebuyers.
In September, the Federal Housing Administration (FHA) proposed an update to its certification policy. Under current policy lenders must certify that the loans they send for FHA for insurance comply with all standards set forth by the FHA. However, in recent years the FHA has forced some lenders to indemnify the FHA of losses on some loans, while the Department of Justice has pursued lawsuits against lenders under the False Claims Act for discrepancies between what lenders certified and what was actually produced. Lenders have been looking for more clarity from the certification policy as to what errors will trigger a lawsuit or indemnification as well as more variation in the degree of punishment relative to the infraction. To protect themselves, lenders have raised their minimum credit scores to ameliorate potential defaults and to avoid gaining the attention of the FHA and DOJ.
More than half (60.0 percent) of respondents indicated that the new proposal would not have an impact on their lending. 10.0 percent of the lenders in the survey indicated that they would raise their minimum credit requirement, while an additional 20 percent indicated that at least some of their investors had raised their requirements for purchasing loans. Of those raising their minimum credit score, 71.4 percent indicated that the new minimum would be 640, while the remaining 28.6 percent would set the floor at 620.
This reading may give some false comfort as many lenders did not follow the example of Wells Fargo and other lenders who lowered their credit standards in the spring of 2014. Thus, this move suggests a modest reversion toward the same overlays that have dominated the market place for several years. Despite this setback, the FHA’s finances will continue to improve due to advantageous pricing and limited risk on its book of business.