Access to credit has expanded in many ways over the last two years including to borrowers with higher debt-to-income ratios, lower down payments, and even some limited non-QM offerings. But access for borrowers with lower credit scores has shown only modest progress. The Federal Housing Administration (FHA) asked for comment in April and May on its latest plan to ease lenders’ reluctance, but lenders who participated in NAR’s 10th Survey of Mortgage Originators responded with mixed enthusiasm.
For loans to be insured by the FHA, lenders must certify that the loans adhere to certain standards. Lenders are required to indemnify the FHA for losses on loans that don’t meet these standards, but more recently the Department of Justice has sued several lenders under the False Claims act because of the discrepancies between originated loans and what lenders certified. Some lenders have argued that potential liability under the False Claims act and the Department of Justice’s apparent willingness to prosecute raised the risk and potential costs for them to lend. To counter this, they have used overlays on credit scores to limit defaults and potential litigation. Thus, the certification process is at the heart of the FHA’s proposed changes.
Nearly a third or 27.3 percent of participants in 10th Survey of Mortgage Originators indicated that despite the FHA’s proposed changes to its certification policy, they would maintain a wait-and-see approach before relaxing overlays on lower credit borrowers. Another 27.3 percent indicated that the change would not result in increased lending to lower credit borrowers. However, 45.5 percent of this sample, which is dominated by mortgage bankers, already lend below the 640 threshold.
Many non-bank lenders have expanded into the lower credit spectrum, but consolidation in the non-bank sector is likely. Consequently, further broadening of the lending base for low-credit borrowers is necessary from both well capitalized non-banks and banks. To this end, the FHA continues to work to expand access to credit, but it may take time for its latest effort on certifications to bear fruit.
 Some non-bank lenders have pushed down the credit spectrum since the fall of 2015, while retail banks remain unmoved.