FHA guideline changes have make obtaining mortgage loans much more difficult in the past few years and it’s possible this may have contributed to a huge drop in mortgage applications. Many people are already a bit fearful of taking on new mortgages thanks to their own financial instability, but those who may feel that they’re ready may be getting turned down by lenders, further contributing to the weakened state of the housing market.
FHA and Lenders Tighten the Reins
According to a new U.S. Census Bureau report, the U.S. home-ownership rate sits at a 10-year low as of the third quarter. In the report, the low rate was partly attributed to rising foreclosures and a tough economy, but a lot had to do with both the Federal Housing Administration (FHA) and private lenders toughening their standards.
There was a time when the FHA did not require a minimum credit score in order to secure a loan. However, that changed in July 2010 when the agency set a minimum score of 500 to create a standard for its borrowers.
This was already a tough blow for those looking for low-cost loans and with some lenders like Wells Fargo & Co. and Bank of America Corp. pushing their own standards even higher than the FHA’s (they both increased their minimum credit scores on FHA-insured loans they buy to 640), it’s that much tougher to acquire a loan.
While Ron Phipps, President of the National Association of Realtors, responded to the stricter standards by saying “We’ve gone from silly to stupid” in a phone interview with Bloomberg, it seems that lenders and the FHA have made up their minds.
Unfortunately, this means FHA loans, which are used in about a fifth of home purchases, will be that much harder to get in a time when more scores are subprime by no fault of the borrowers.
Mortgage Applications Have Dropped
A report from the Mortgage Bankers Association on Wednesday revealed that U.S. mortgage applications dropped last week by the most this year, largely due to an increase in borrowing costs. The MBA index fell 14 percent in the week ended Nov. 12 while refinancing plummeted 17 percent.
While the drop in applications has not been directly attributed to stricter lender guidelines, there’s no doubt that it could be related. If lenders tell borrowers that they won’t qualify for a mortgage loan if they apply, there will be no need to fill out the application.
Taking on a stricter guidelines in a weak housing market will likely ensure it remains weak. Of course, lenders are trying to protect themselves from default, but by closely examining the history of borrowers, they could find that many of them had near-perfect credit histories until they were forced to default on loans after losing their jobs during the recession.
Without taking time to understand specific circumstances of borrowers, home ownership will probably remain low and the market will take that much longer to recover–if it recovers at all.
