Uncategorized March 30, 2014

More Banks Lower FICO Score Requirements.

More banks are lowering minimum FICO score requirements in an attempt to shore up lending for underserved borrowers. Carrington Mortgage Services is the latest company to announce that it has lowered its minimum FICO score to 550. It also has expanded guidelines on several FHA, VA, and USDA loan programs to aid those with FICO scores below 640. Wells Fargo, the nation’s largest mortgage lender, said in February that it was lowering its minimum FICO score requirements on FHA-backed mortgages from 640 to 600. The move, bank officials said, was aimed at “opening up our credit box more.” One in three consumers have a FICO score below 650, according to Carrington.

Lenders are returning to the subprime market – although still at only a fraction of what subprime lending was before the mortgage crisis, BusinessWeek reports.  Some subprime lenders that collapsed during the financial crisis are coming back into business with new nonprime loan offerings. “There needs to be a solution for people who don’t fit in the box, and rebuilding nonprime lending is it,” says Bill Dallas, with his new venture NewLeaf Lending in Calabasas, Calif., which will begin issuing nonprime loans. However, he says this time around tougher lending rules will require borrowers in some cases to put up to 30 percent down as well as require more careful documentation of borrowers’ incomes, credit, and work history. About $3 billion of subprime mortgages were issued during the first nine months of 2013, according to Inside Mortgage Finance. In 2005, subprime originations totaled $625 billion.

Subprime loans – mostly targeted to those with credit scores below 660 – took a lot of blame in the financial crisis. Lenders sold high-risk products to investors with adjustable-rate mortgage products that had interest rates that could triple after two years, in some cases. Also, many of the loans had required little documentation about the borrowers’ income and assets. The loans were blamed for sparking a huge wave of defaulting borrowers. Since then, federal regulators have restricted many high-risk mortgage products. Lenders are also requiring higher credit scores and greater documentation of a borrowers’ financial situation.

After everything the mortgage industry has gone through, why would Wells Fargo want to go there again? The bank announced earlier this month that it would drop its minimum credit score for loans backed by the Federal Housing Administration to 600 from 640. The change applies only to purchase loans, not refinances, taken out through its retail channel.

The FHA requires minimum down payments of just 3.5%, making it an attractive option for first-time buyers; borrowers with credit scores below 580 have to put down 10%. Many lenders stopped making FHA-backed loans to borrowers with credit scores below 620 or 640 in 2009 as defaults soared, but in recent months, a handful of lenders have said that they’re willing to go as low as 580. In 2011, Wells said it would make FHA loans to borrowers with 580 credit scores, though it later raised those minimums to 600 and then to 640.Wells Fargo’s latest announcement followed discussions with housing regulators and other policymakers who are concerned about potentially creditworthy borrowers being shut out of the housing market, according to people familiar with the matter. Some of these borrowers may be good credits, but they have trashed credit from the recession.

Moreover, the return of subprime lending could be slowed by new mortgage-lending regulations that provide stronger legal protections to borrowers if lenders don’t satisfy certain criteria verifying a borrower’s ability to repay a loan.A handful of specialty lenders have expressed interest in making loans that fall outside of these standards, but so far, the actual production of these products is minimal.