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WaPo: Federal Govt Is Throwing Up Obstacles to Middle-Class Mortgages

By    |   Monday, 08 September 2014 02:59 PM

The federal government might be making it harder for middle-class Americans to buy homes, according to The Washington Post.

The newspaper said lenders are rejecting potential homebuyers by demanding unusually high credit scores and setting standards on government-backed loans that are even higher than the government's own criteria is.

The motivation for the tougher standards is seen as a fear by lenders that to do otherwise would set them up for financial penalties and lawsuits because of the new, stricter regulatory environment in Washington, D.C.

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"The reluctance to lend has alarmed policymakers and heightened tensions between them and the industry as each side struggles to rectify the problem without exposing themselves to unreasonable financial risks," The Post noted.

Thus the Obama administration is calling the leaders of some of nation's biggest banks to Washington on Sept. 17 to confront the issue. According to the Urban Institute, up to 1.2 million home loans would have been made annually since 2012 if pre-housing bubble lending standards were still intact.

"The government, determined to prevent a repeat of the irresponsible lending practices that sparked the housing bust, has forced lenders to buy back billions of dollars in loans and continues to trumpet massive legal settlements with the industry," The Post said.

Industry officials told the newspaper that while lenders should be held accountable for the kind of fraudulent activity that occurred during the housing bubble, such as falsifying documents or faking tax returns, they maintain the government should not be poring through loan files for minor errors to force loan buybacks or invoke financial penalties.

"The mortgage industry is basically ticked off," said Guy Cecala, publisher of the trade newsletter Inside Mortgage Finance. "They see the government hammering them and at the same time urging them to loosen the credit standards and accept more borrowers."

Investors now oftentimes refuse to buy Federal Housing Administration-insured mortgages if the borrowers have credit scores below 640, although the FHA typically allows scores as low as 580, The Post reported.

An analysis by the Urban Institute estimated there are 13 million potential borrowers with scores between 580 and 640 in the United States, yet FHA-backed loans to people with scores below the 640 threshold were "basically nonexistent" last year.

The mortgage void being left by traditional banks' reluctance to lend is being filled at some level, according to The Wall Street Journal.

Lenders that aren't banks made almost a fourth of all mortgage loans in the first half of 2014, a peak since the financial crisis, according to data on the top-30 mortgage originators from Inside Mortgage Finance.

Mortgage lending at big banks such as Wells Fargo and JPMorgan Chase has fallen sharply in the wake of large mortgage-related legal settlements, new banking standards that require lenders to carry more capital and increased scrutiny from regulators, The Journal reported.

"One man's trash is another man's treasure. If the banks were not going to fill this requirement in our economy . . . we wanted our market share to go up as those opportunities in origination arise," said Freedom Mortgage Chief Stanley Middleman, a non-bank lender that tripled its originations of mortgages for home purchases to $5.1 billion in the first half of the year.

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The federal government might be making it harder for middle-class Americans to buy homes, according to The Washington Post.
mortgage, lend, credit, score
Monday, 08 September 2014 02:59 PM
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