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Do FHA Mortgage Borrowers Still Face Credit Score Layering?

More that a year has passed since HUD announced that it would investigate 22 lenders. The issue? Layering, the addition of requirements on top of FHA standards.

“The investigations,” said HUD, “are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African Americans and Latinos with credit scores as high as 640. Federal Housing Administration (FHA) guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5 percent of the loan amount, or above 500, provided the borrowers have down payments equaling 10 percent of the loan amount.”

In the usual case lenders can set whatever terms they want to underwrite a loan. However, the FHA loan program is an important exception. Here’s why:

“This decision is arbitrary,” says John Taylor, president & CEO of the National Community Reinvestment Coalition, “because the loans are 100% guaranteed, whether the borrower’s credit score is 580 or 780. That means the loans with lower credit scores don’t pose additional risk to the company, so there’s no legitimate business defense for this across-the-board practice.”

To its credit, at least one lender — Quicken — has said it would stick with FHA credit score standards. Quicken was not among the 22 lenders named by the NCRC in its layering study.

“In an effort to make homeownership possible and more affordable for families across the country, Quicken Loans Inc, the nation’s largest online retail mortgage lender, announced they have eased the minimum credit score necessary to qualify for an FHA loan to 580. This change allows more consumers to qualify for an FHA loan, as previous guidelines required a minimum credit score of 620.”


Quicken also makes a good point regarding credit scores in general.

“There are folks who have steady incomes, and a solid payment history but were temporarily affected by the economy or a life event in some way. These challenges can lower their credit score significantly. We believe that a credit score, on its own, is not the sole arbiter of a person’s credit worthiness,” said Bob Walters, Quicken’s chief economist. “This change will open up credit to a significant group of people and allow them to again have access to purchase or refinance a home.”

Tight Credit Standards

With all the complaining about allegedly-tight loan standards — much of which is nonsense — there is simply no justification for FHA layering. FHA mortgages must conform to standards set by HUD, not artificial and arbitrary standards above and beyond what HUD requires. Lenders who simply follow HUD guidelines can be rewarded with originations, profits and 100-percent loan guarantees.

That’s not a bad deal for lenders, borrowers or the FHA. The evidence? For the third quarter of 2011 the Mortgage Bankers Association reports that the general foreclosure rate was 4.43 percent — but the foreclosure rate for FHA loans was 3.27 percent.

So do FHA mortgage borrowers still face credit score layering? The betting here is no. Expect the results of the HUD investigation in about a month.

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Posted in: Mortgages

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