Banks Hurt Creditworthy Buyers

When you look at the success of FHA over the last few years since the downturn you have to wonder what’s up with the banks.

Although the agency has had its credit challenges it never lost sight of the tough times borrowers face in the market today.
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A case in point is its credit score policy. Even for struggling households whose credit score is as low as 580, the agency will back their mortgage as long as they’re buying their primary residence and they can show they’re prepared to be responsible home owners—and they can still get a low down payment.

FHA’s reward for this policy, if you can call it that, is a 30-percent market share and a continuing sound financial position.

You see nothing like this with the banks, despite the tens of billions of dollars they received from the federal government under the Troubled Asset Relief Program (TARP) and the Federal Reserve’s $1.25 trillion investment in mortgage-backed securities.

Banks today will hardly look at borrowers with credit scores below 650. And for those with scores as low as 620, households probably don’t even get the option of submitting an application.

This is more than a shame for the borrowers, many of whom, as FHA has demonstrated, are well prepared to be home owners; it’s an unnecessary constraint on home sales.

The banks’ cookie-cutter approach to who can and can’t qualify for mortgage financing is artificially constraining home sales by as much as 20 percent of the market at a time when the economy is looking to a healthy real estate sector to spur growth.

The banks should be held accountable for using a FICO score to determine a one-size-fits-all scenario for borrowers.

Given that the huge echo-boomer generation is entering prime home buying age, the mortgage industry faces an imperative to get its act together. For many of these young people, all they know about home ownership is the mortgage meltdown. There is a concern about losing this generation of households to home ownership if the banks don’t start closing what he called their “trust deficit” with consumers.