Mortgage lenders foresee less lending to subprime consumers

One issue many experts believe is constraining a more robust housing recovery is that lenders still remain rather tight-fisted with their credit qualifications. Now, some of those institutions say new federal rules might force them to constrain standards even more.

In the next few months, federal regulators are planning to release a number of new rules for the lending industry that are ostensibly designed to help consumers avoid troubling or even abusive practices from both standard financial institutions and nonbank actors, according to a report from Bloomberg News. However, many in the lending industry say that for the most part, these new restrictions place too many constraints on them and as such, could lead to lenders hedging their bets on consumers, and therefore provide less in the way of financing to people who might be able to qualify for mortgages on the lower end of the spectrum today.

“There’s this intersection of policies that are absolutely not being considered by this massive array of institutions, all involved in deciding the future of homeownership and rental opportunity,” David Stevens, president of the Mortgage Bankers Association, said in a recent speech at the association’s annual conference in Chicago, according to the news agency.

The current problem

Experts note that even for many consumers with top-quality credit ratings, it’s still difficult to obtain mortgage financing in many cases, the report said. Those as well-known as Federal Reserve chairman Ben Bernanke and secretary of the U.S. Department of Housing and Urban Development Shaun Donovan have both noted that despite near-record highs in affordability, many consumers simply don’t have access to the kinds of credit they’d need to buy a home.

Ellie Mae, a Pleasanton, Calif., company that provides automation solutions for the mortgage industry recently reported that in the month of September alone, the average credit score of a person who received a mortgage was 750, the report said. That puts the typical mortgage borrower in the top 40 percent of consumers nationwide, meaning that 60 percent will have difficulty qualifying for such a loan. Further, the average borrower also made a down payment of 22 percent of the total value of the financing, meaning that it may be more difficult for borrowers to set aside that kind of money, as in the past, down payments were traditionally much lower.

Combine the difficulty in obtaining financing in the first place with the fact that Zillow saw home prices rise 1.3 percent in the third quarter of the year, and that may add further pressure to borrowers in shakier financial situations, the report said.

The mortgage industry’s response

The new home loan rules will go into effect in late January, and at that point, many lenders will likely tighten restrictions once again, the report said. This means that they’ll only take on mortgage borrowers who they believe to be far more safe than the already-restricted demographic to which they currently lend.

While regulators say the rules are intended to add stronger legal protections on loans for consumers who are spending less than 43 percent of their income to pay debt (including 80 percent or so of loans backed by the federal government), lenders say the added requirements will be too large a hassle, the report said. Further, once the federal Consumer Financial Protection Bureau puts its qualifying mortgage rules in place, other regulators, including the Federal Reserve Board, will follow that up with another regulation called the qualified residential mortgage rule, which requires lenders to maintain some risk when packaging riskier home loans into securities.

Where consumer advocates land

However, many who believe the rules will be helpful to consumers, rather than harmful to lenders, say that the actual issues faced by the latter group won’t be as bad as they’re being made out, the report said. In fact, because some regulations pertain to the packaging and sale of risky mortgage securities, they say the rules could also be helpful to the economy; that kind of practice contributed to the housing market collapse seen in the last few years.

“Unfortunately, the mortgage lobby is the boy who cried wolf,” Julia Gordon, director of housing finance and policy at the Center for American Progress, told the news agency. “They fight any and every regulation and routinely insist that the [fill in the blank] rule will increase the cost of credit or reduce access to credit, which makes it difficult for the regulators to figure out when that’s actually true.”

Of course, if you are looking for a new home loan, perhaps the best way to make sure you’re ready and qualified for this type of credit is to order a copy of your credit report. By doing so, you may be able to identify potentially unfair markings that are marring your credit score and restricting your access to credit you otherwise deserve.

Posted in Mortgages
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