The future of loan originators and housing recovery is hanging by a credit thread. According to the Federal Housing Finance Agency (FHFA), the credit composition of originated loans within the Government Sponsored Enterprises’ (GSE) portfolio is showing a tightening trend. From their latest press release: “The increase in the number of loans with 660 or higher credit score and decrease in loans with less than 660 credit score at origination reflect actions taken by both Enterprises (FN/FRE) to increase the credit quality of new business and continues a trend seen over the past year. The trend is in response to rising delinquencies. The delinquencies are forcing the GSE’s to cut back on taking any loans on their books that do not meet high credit standards.
Where will this push borrowers? Well, if borrowers cannot get a conventional product due to credit issues, they will likely head towards FHA. Can FHA handle any more of the ‘uglier’ side of the mortgage market? According to recent reports of FHA’s struggles to stay out of default, the answer would be “no.”
There have long been discussions on fair and proper credit reporting. With such a large portion of the borrowers now making late payments or defaulting on debts due to unemployment, underwater house values, and general stresses, there will need to be a new FICO model. Without changes in credit measure, there will be exponentially fewer Americans qualifying for credit. The current credit restrictions are putting up roadblocks for many borrowers. Fewer borrowers, means even slower economic growth.
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