WASHINGTON — The housing market has been improving but mortgage credit remains "stubbornly" tight on loans bought by the government-sponsored enterprises, according to a chief housing adviser at the White House.
Although the Federal Reserve's senior bank officer survey indicates there has been a little loosening, "we are still seeing an average 750 FICO score on GSE loans," the adviser, Michael Stegman, said Wednesday at a Financial Services Roundtable event.
Barry Zigas, the housing policy director at the Consumer Federation of America, said that credit is still "very, very tight," compared to the pre-crisis mortgage lending standards. "That is true in the GSE channel and true in the FHA channel," he said.
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Wells Fargo is raising minimum credit score requirements on Federal Housing Administration loans, part of the ongoing jockeying by large banks to limit lawsuits by the Justice Department for defective FHA loans.
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The Federal Housing Administration said Tuesday that it has revised its proposed lender certification requirements in an effort to provide more clarity and reassure lenders they won't be penalized for minor loan defects or mistakes.
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It's hard to decide which is more surprising: that the largest U.S. bank has almost abandoned the business of making home loans insured by the Federal Housing Administration, that lots of big banks could be right behind it, or that the FHA might not even need to care.
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Zigas noted that servicing rules have raised the cost of dealing with defaults and failed mortgages.
"The industry has looked at that and said that is reducing my appetite for loans that I know will have a higher failure rate," he said. "And that is going to have an impact on access to credit."
Speaking at the same event, Keith Bickel, a senior vice president at Bank of America, said lenders are still adjusting to the regulatory changes made in recent years and are bracing for even more new rules to be issued this year.
"These are major technological and process changes to institutions like ours," Bickel said. "It is an overlay effect that we don't fully appreciate yet."
Bickel said that the pace and scope of regulatory changes have contributed to "what we see as the tightening of credit."
Federal Housing Administration lenders are concerned, meanwhile, about being penalized for minor loan defects or mistakes. And "that is keeping lenders out of the lending channel that offers the most flexibility for consumers and that is a serious concern," Zigas said.
The FHA recently proposed a clarification of its loan certification standards in an effort to assure lenders they won't be penalized for minor defects on loans.
But lenders don't appear to be reassured by the agency's effort, according to mortgage consultant Brian Chappelle, a co-founder of Potomac Partners.
By raising the issue of loan certifications and the Department of Justice's enforcement actions against FHA lenders, "it probably has put more fear into smaller lenders," Chappelle said in an interview. "While FHA was trying to allay industry fears, I think it was a net negative based on the questions I get from leaders who are more worried about the certifications. Any changes in this environment worry lenders."
Big lenders are also concerned about the FHA's loan certification standards and the risk for enforcement actions.
JPMorgan Chase has "dramatically reduced" its Federal Housing Administration business because it is simply too costly and too risky to originate FHA mortgages, according to the bank's chairman and CEO, Jamie Dimon.
In a letter to shareholders, Dimon said that "part of the risk comes from the penalties that the government charges if you make a mistake — and part of the risk is because these types of mortgages default frequently. And in the new world, the cost of default servicing is extraordinarily high," he said in the April 7 letter.
In early 2015, JPMorgan agreed to pay $614 million to settle claims by the FHA and the Department of Justice that it improperly approved FHA-insured loans that did not meet the agency's underwriting standards.
