Tight underwriting has made mortgage credit hard to come by, even for the most creditworthy borrowers. But the situation is even tougher for people who come from backgrounds that avoid debt, leading to little or no credit history.
Minorities are particularly susceptible to this credit crunch, and leaders from Capitol Hill, the federal government and the real estate industry recommitted at an event this week to do something about it.
“Too many creditworthy borrowers are prevented from accessing mortgage credit because they have insufficient credit history, despite years of on-time payments on utilities, rent, and other payments that aren’t considered by current models,” National Association of Realtors® President Tom Salomone said in a statement following the event. “That isn’t just bad for the individual, who’s kept from the dream of homeownership. It’s bad for the broader economy, as young, minority, and first-time homebuyers are prevented from buying a home even though they have the means to do so responsibly.
NAR – along with the Asian Real Estate Association of America, the National Association of Hispanic Real Estate Professionals, and the National Association of Real Estate Brokers – hosted a “credit symposium” today to examine legislative proposals for alternative credit scoring and discuss efforts already underway to address the issue. Participants included Ed Golding, Principal Deputy Assistant Secretary at the Department of Housing and Urban Development, Richard Green, a Senior Advisor at HUD, and Patricia McClung, Assistant Director for Mortgage Markets at the Consumer Financial Protection Bureau.
And although opinions on how to solve the problem vary, experts at the symposium agreed that a number of hurdles on the path to a solution must first be addressed.
McClung noted the balancing act between providing access to credit and protecting consumers from risky lending practices. She added that regulators like the CFPB see this challenge most acutely in mortgage credit, versus other forms of lending, as a home purchase represents such a significant investment for most borrowers.
But Richard Green, a Senior Advisor on Housing Finance at the Department of Housing and Urban Development, said that he believes the “bubble wrap is too tight,” meaning credit markets today are inadvertently leaving good, responsible borrowers out of the picture amidst efforts to strengthen underwriting.
Noting that his comments reflect personal opinion, and not necessarily that of HUD, Green argued that underwriting based on hard “cutoffs,” such as a 43 percent debt-to-income ratio, is a poor predictor of default. Instead, Green said, they may be leaving what he described as “good business” on the table.
Members of Congress were on hand at the event to remind the audience of experts that attempts to address this issue are underway. Congressmen Keith Ellison (D-Minn.), Ed Royce (R-Calif.), and Al Green (D-Texas) have each introduced legislation to expand access to mortgage credit, and NAR is supporting their efforts.
For example, Rep. Green’s “FHA Alternative Credit Pilot Program Reauthorization Act of 2015” (H.R. 123) would amend the National Housing Act to extend a pilot program establishing an automated process for providing alternative credit rating information. This initiative is aimed at prospective borrowers who have the means to purchase a home responsibly, but who can’t get a loan because of insufficient credit history.
NAR supports this legislation, along with Rep. Royce’s “Credit Score Competition Act of 2015” (H.R. 4211) and Rep. Ellison’s “Credit Access and Inclusion Act of 2015” (H.R. 4172). These efforts, if successfully passed, are expected to help clear the way for responsible borrowers who are currently locked out of mortgage credit markets.
Beyond the legislative approach, experts at the symposium offered ideas for fresh approaches to mortgage credit that open the credit box while maintaining a commitment to responsible lending.
Green said lenders and regulators should consider the value of statistical analyses and fresh models that measure borrowers with a wider range of factors. He also suggested the value in a lender taking into consideration the type of mortgage product a borrower is looking to access.
Whether or not these proposals will take hold moving forward remains to be seen, but NAR President Tom Salomone said Realtors® will continue to make the case in Washington and in communities around the country.
“Realtors® know what credit access means to homeownerships, and we’re going to do our part for all the responsible borrowers who can’t get in the door,” said Salomone. “It’s clear that leaders within the industry as well as in government are committed to improve this situation for borrowers, and I’m pleased that so many of them made themselves available to further discussions on this important issue.”