I recently read a news release from Freddie Mac, the 2nd largest government sponsored entity. Higher fees translate to tighter lending, and the updates continue to focus on borrowers classified as those with “less than perfect” credit profiles established by credit scoring. These borrowers will now face higher closing costs and mortgage rates, but the new changes affect not just the weakest borrowers; the middle-tier ones are being hit as well. For example, a borrower with a 715 score and 77% loan to value will now pay approximately .25% higher rate. A borrower with a 695 credit score will pay about .5% higher in interest rates.
Two thoughts come to mind. First, when did a 715 credit score become a cause for punishment? Second, when are we going to learn from history? In 1934, the housing economy was going nowhere. Home prices were falling. Joblessness was at levels never seen before. Terms for mortgages were very difficult to meet. Sound familiar? Along came the FHA. By lightening up on the lending rules, homeownership increased, housing prices stabilized, and more people began to work.
I am not advocating that we lend money like it is 2005 all over again. I am, however, suggesting that we get away from automated lending decisions and credit scoring. Lending decisions should be made by people trained to understand a credit report rather than a machine that utilizes mysterious criteria.
The Real Estate bubble was actually created by using credit scores; at that point though, the very same scores helped determine that we could lend to anyone with a pulse. The mortgage market imploded because we created mortgages which made little to no sense, but they satisfied appetites for hunger beyond folks’ economic means. Just think of the negative amortization loans and interest only loans we provided to the average everyday consumer who at best was looking at a cost of living increase each year…
Now we have migrated into a world where GMAC mortgage has overlays which will not allow a borrower to buy a home under the “flipping waiver” set by the FHA. This means a lender using my (yours too) tax dollars as a loan to get out of bankruptcy will not lend a borrower with a 715 credit score a mortgage to buy a home that has transferred ownership in the past 90 days. Visit the above linked waiver (see determination) to understand how these purchases again help the housing economy.
I have concluded from all of this that the GSE’s and the banking sector reached the verge of bankruptcy and needed our help financially. So we, as tax payers, lent money to our own version of a “less than” borrower with a less than perfect credit history, who has elected to add insult to injury in choosing to ignore history’s lessons on how to help pick up and reinvigorate our economy.