Weekend Conversation: Financial Reform & FHA Credit Scoresby Tim Manni
Today’s post will be a lot like last week’s. Instead of writing one longer piece, I’m going to give you a few ideas to think about over the weekend.
How Will the Financial Reform Impact Mortgages?
From what we know about the bill at this point, the main impact this legislation will have on the mortgage market goes a little something like this: with increased protection comes higher costs and fewer loans:
The bill will offer more protections for consumers against risky or complex mortgages, but bankers say that with fewer choices and more safeguards, loans could be slightly more expensive. The upshot, says Howard Glaser, an industry consultant and Clinton administration housing official, is that consumers will have “safer” loans, but fewer of borrowers will qualify.
Also, the exotic and complicated loan types which contributed to the subprime crisis will make way for “plain vanilla” mortgage products.
The issues we have with the “plain vanilla” idea are as follows: Regulators are going to have to spend a substantial amount of time studying and identify which products can and will be classified as “safe” and “simple.” As we noted in the Mid-Year Review of our 2010 Outlook, “we will probably be looking at years of regulatory uncertainty as studies are conducted and new rules are ironed out.” Furthermore, this could lead to the disappearance of certain loan products that, when used properly, serve an important purpose and function in the overall mortgage landscape.
FHA: No More Sub-500 Credit Scores
Good! The Federal Housing Administration (FHA) has changed their tune about not requiring minimum credit scores. With all the loan volume the FHA has taken on recently, it’s important that they begin employing stricter requirements, even if they won’t impact a great deal of borrowers (it’s all about baby steps, right?).
The practical impact of this move will be extremely limited; during the second quarter of 2010, no FHA-insured loans were issued to borrowers with sub-500 scores. And, in fact, less than 1% of borrowers were below 580; most loans went to borrowers with scores above 620.
“It really is just conforming FHA standards to what FHA lenders have already been doing,” said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.
Another change the FHA has up their sleeve: a reduction in FHA seller assistance. This change is expected to make a much more profound impact and may start as early as next month, says the Wall Street Journal.
Got an idea for a blog post next week? Leave us a comment and let us know what it is!