Forget FICO Scores? ‘Homeownership is an integral part of the American Dream’!

By | December 11, 2015

Hmmmm…Where and when have I heard the phrase “Home ownership is an integral part of the American Dream?” before?

Was it in statements concerning the Community Redevelopment Act (CRA)* and that period in American history leading up to the great financial crisis of 2008?

A time in residential real estate when basically anyone with a pulse could be approved for a mortgage! A time when mortgage-backed securities were stuffed with the so-called liar loans that ultimately imploded. Where stated loans with underwriting done based only on the information supplied by the borrower were so readily available.

Then of course, post financial crisis, underwriting standards that had been far too lax swung all the way in the opposite direction to a point where only the most pristine borrower could qualify for a mortgage loan.

Well now, in a repeat of the phrase that history tends to repeat itself, the criteria for being approved for a mortgage and the amount of leverage that can be provided is moving back in the direction of what was in place during the pre-2007 real estate go-go years.

Earlier this week the HomeReady Mortgage program from Fannie Mae was discussed in the article ‘97%+ Loan-To-Value Mortgage Loans: It’s Deja Vu’ All Over Again!‘.

These loans offering 97% or greater loan-to-value ‘become possible ‘based not on the borrowers income (which is too low) but on “non-borrowers” like extended family or children!

Now Potential Alternatives To The FICO Score!

And now, just yesterday in Washington, a bi-partisan bill was introduced by Rep. Ed Royce, R-CA., and Rep. Terri Sewell, D-AL. by the name “Credit Score Competition Act of 2015“!

Is what will be described below sound fiscal policy or an attempt to return to the very problems that have brought our economy to the condition that it is in today?

In an article from HousingWire.com, the legislation was explained in the following way…

According to a joint release from Royce and Sewell, the bill would enable Fannie and Freddie to consider other credit-scoring models, which would level the playing field for borrowers whose credit doesn’t meet FICO’s standards and make it easier for them to buy a home.

“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation, but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time,” Sewell said in a statement.

Home ownership is an integral part of the American Dream that shouldn’t be out of the reach for low-income, rural, and minority borrowers who lack access to traditional forms of credit,” Sewell continued. “This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across the country.”‘ (Read the rest of the article here)

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*In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of “innovative or flexible” lending practices to address credit needs of LMI borrowers and neighborhoods. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards. (Source)

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

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