For more than 20 years, Mark Vinciguerra’s small bank specialized in making home loans to first-time buyers in the northwest Ohio suburbs. Then the recession hit, and auditors at Fannie Mae and Freddie Mac came knocking.
The mortgage finance giants demanded that Vinciguerra buy back more than 200 loans he’d sold them that were teetering into foreclosure, claiming that the bank had failed to meet their quality standards. Vinciguerra ultimately repurchased only five loans, but endless hassles over the others shattered his willingness to take a chance on some moderate- and low-income borrowers.
“Like so many lenders, we thought: ‘Heck, we’re just going to raise the bar,’ ” said Vinciguerra, who insists the loans went bad because of skyrocketing unemployment. “We’d like to be serving those people again, but there’s no trust in the system right now.”
Just as the housing recovery should be taking off, lenders are turning away potential home buyers by demanding unusually high credit scores and other tough standards on government-backed loans – exceeding the government’s own criteria in a bid to insulate themselves from financial penalties and lawsuits. 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 White House has summoned the heads of some of the nation’s largest banks for a meeting in Washington on Sept. 17 to tackle the issue head-on, frustrated that its many pleas to ease lending criteria have fallen on deaf ears. As many as 1.2 million additional loans would have been made annually since 2012 if normal, pre-housing bubble lending standards had been in place, according to a recent analysis by the nonpartisan Urban Institute.
But lenders say the mixed messages they’re getting from Washington give them no incentive to widen access to credit. 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 largest came two weeks ago when Bank of America agreed to pay $17 billion to resolve claims that it sold the government defective mortgages.
“The mortgage industry is basically ticked off,” said Guy Cecala, publisher of the trade journal 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.”
Indeed, Jamie Dimon, chief executive of JPMorgan Chase, is leaning in the opposite direction, and has publicly threatened to cut off business with the Federal Housing Administration, a popular source of low-down-payment loans for first-time buyers.
The situation is untenable for lenders, said David H. Stevens, president of the Mortgage Bankers Association and a former FHA commissioner who said he plans on attending the Sept. 17 meeting with the administration’s top housing officials. It’s also creating a homeownership opportunity gap.
“It’s very clear that the proverbial 1 percent, the wealthy American who wants to buy a home, is going to get credit,” Stevens said. “It’s some of the average entry-level or move-up buyers who are getting boxed out.”
Fannie, Freddie and the FHA collectively own or back nearly half of all U.S. mortgages, according to Inside Mortgage Finance.
None of them makes loans, though they are critical to making mortgages widely available.
Fannie and Freddie buy loans from lenders, package them into securities and sell them to investors. For a fee, they guarantee the mortgages and then pay investors if the loans default. The FHA insures the lenders it works with against losses if loans go bad.
The housing bust took a huge toll on all three entities. The government took control of Fannie and Freddie in 2008 to keep them solvent, and the FHA had to tap taxpayer money for the first time in its history last year to cover its losses.
Now, housing experts say the government’s push to hold the industry accountable for loose lending practices is unintentionally steering lenders toward the highest-quality borrowers, undermining the institutions’ missions to serve the broader population, including moderate- and low-income families.
“What we have now is a system, because of tight lending standards, that is excluding far more borrowers who are going to succeed
than fail,” said Barry Zigas, director of housing policy at the Consumer Federation of America.
President Obama has appealed directly to the banking industry several times for greater leniency, once in a State of the Union address. Federal Reserve Chair Janet L. Yellen weighed in this summer, lamenting that “any borrower without a pretty pristine credit rating finds it awfully hard to get a mortgage,” which in turn has slowed the housing market’s recovery.
Industry insiders say the administration could help by encouraging regulators to ease up. Lenders should be held accountable for the type of fraudulent activity that took place before the housing crisis, such as falsifying documents or faking tax returns, they say. But they argue that the government should not be scouring loan files for minor errors just to force a buyback or justify financial penalties.
Industry insiders also argue for clearer rules governing when Fannie, Freddie and the FHA can take action against a lender. Many lenders said they had been asked to buy back loans or reimburse the government for losses even when their lending practices had nothing to do with the loans’ default.
Bill McCue, president of McCue Mortgage Co. in Connecticut, cites an FHA loan he made in 1994. The borrowers kept up with the mortgage payments until 2010, when their marriage fell apart. The house went into foreclosure and sold at a loss, and the FHA came after McCue for the $100,000 difference between the sale price and what was owed on the mortgage. The reason: an allegedly fraudulent signature on a $1,000 gift that a family member put toward the down payment 16 years earlier.
“It was the marriage falling apart that did them in. One of the spouses stopped contributing to the mortgage,” McCue said. “What was I supposed to do back then? Sit them down and say: ‘How’s that marriage going for you?’ ”
McCue fought the FHA and ultimately won. But his lending practices have been affected, he said, by the investors who buy the loans his bank makes. Those investors, he said, now routinely refuse to buy FHA-insured mortgages if the borrowers have credit scores below 640, even though the FHA typically permits scores as low as 580.
That cutoff point is not uncommon, lenders say. There are 13 million potential borrowers with scores between 580 and 640, yet FHA-backed loans to people below the 640 threshold were basically nonexistent last year, according to an analysis by the Urban Institute.
“Are the lower-credit-score borrowers a little more risky than someone with an 800 credit score? Certainly,” said FHA Commissioner Carol Galante. “But this is how families get into the middle class and succeed.”
Earlier this year, Wells Fargo, the nation’s largest mortgage lender, tried to unfreeze credit for most of that group, announcing that it would lower its minimum credit score for FHA loans from 640 to 600. Mike Heid, president of Wells Fargo Home Mortgage, said the company was expecting the government to clarify its rules and expectations soon thereafter. Six months later, the industry is still waiting.
“The issue has been out there for a couple of years now,” Heid said. “I think it’s now time for decisions to get made and actions to be taken by Fannie, Freddie and FHA.”
The institutions say they are taking action. The FHA is working to compile a single set of guidelines to clear up lender confusion. Meanwhile, in July, the regulator that oversees Fannie and Freddie loosened some of its policies on mortgage buybacks. Now, lenders cannot be forced to repurchase a mortgage if the loan survives three years with no more than two 30-day delinquencies and if the 36th monthly payment is on time.
The change, which liberalizes a policy adopted last year, is intended to give lenders peace of mind. But many lenders say it doesn’t because it subjects them to buybacks in cases of fraud or misrepresentation, terms that the industry says are ill-defined.
Don Calcaterra Jr., president of Towne Mortgage Co. in Michigan, said he is not reassured. In fact, Calcaterra said he just turned down a potential home buyer with a stellar credit score, plenty of cash and limited debt.
At 62, the customer wants to sell his Detroit-area home and buy a condominium with a 50 percent down payment. But the man had a $50,000-a-year severance package that expires in March. He has yet to decide if he will seek a job or file for Social Security after that – meaning his loan would run afoul of Fannie and Freddie guidelines that require proof that his earnings will cover his mortgage payments for three years, Calcaterra said.
“We’re afraid if Fannie or Freddie did a review of this one, they would say we have to buy it back,” Calcaterra said. “Most lenders would look at this and say: ‘This is a good loan, but we can’t make it.’ “