Looking at
Lenders are writing loans in the low 6s to go into UMBS and Ginnie Mae 5s: a deceptively normal world — until we look at short-term financing rates above 6%. Almost forgotten are the months from Q2 2020 through 2021, when the U.S. mortgage industry produced something like $7 trillion in production and produced around 10 million new loans.
That period during the COVID pandemic produced enormous profits for many firms, but that feast also created today's unprecedented drought of new loans. Half of all 1-4s have coupons are well below 4%, meaning much of this production may not be in the money for refinance for many years to come. By pulling new loans into 2020 to 2021, the Fed's progressive mandate left today's markets light by several million loans.
More efficient firms are prospering today,
After the close of the markets Friday, for example, PacWest announced it was
The MBA Performance Survey shows that cost per new loan continues to climb over $12,000, a 50% increase from five years ago.
One area of increasing interest are Federal Housing Administration rejects, loans that were declined previously, especially to low-income households. Ironically, even in government programs run by the FHA under President Joe Biden, systems that are meant to protect borrowers are actually an obstacle to accessing credit.
Let's say you were denied credit by a government issuer, a bank or credit union that has higher credit overlays than the FHA minimum requirement. That lender must file a call report documenting the credit decline. Congratulations,
The rejected loan is now flagged for other lenders in the FHA's own call report system as a "high risk" loan. Lenders that might have approved the loan in the first instance will now pass on taking a second look. The reject report in the FHA system is a scarlet letter that stigmatizes borrowers who may have simply called the wrong lender, a bank, for example, as opposed to a nonbank lender.
While the FHA system for tracking data on rejects is a complete shambles, unusable for any discernible public or commercial purpose, it does do one thing really well: it denies credit to some of the most underserved communities in the U.S.
Let's say your loan application to XYZ Bank was rejected. If a second lender looks at the borrower, they may find little or no information in the FHA's antiquated system as to why the loan was denied. Taking a second look at credit rejects is very costly for lenders under the FHA's antiquated rules.
Even as it wrongly stigmatizes low-income borrowers, the FHA system does not even document how the first lender made the credit decision. Lenders must try to discover or guess, for example, why the loan was denied the first time and then fully mitigate that concern. If a private firm treated a consumer in such a shabby fashion, they would be subject to severe legal sanctions.
There is no way for the lender to know what documentation was received from the borrowers, thus the FHA call report system is basically useless for lenders and defamatory to consumers. A new lender sees 4 abbreviated dropdowns in the FHA system (credit characteristics, adequacy of income, stability of income and adequacy of avail assets).
Since there is no deterministic requirement for minimum data entry or completeness as, for example, in a bank call report, the FHA report is basically useless. Whatever purpose the FHA system is supposed to provide seems superfluous given the operational deficiencies. The FHA, like much of mortgage land, is half a century behind new technology that retains all data used in a loan underwrite.
In discussions with several lenders for this comment, consensus exists that HUD and the FHA ought to consider doing away with credit reject reports entirely. Lenders can already see that a borrower previously was denied credit using commercial credit reporting systems, thus the reject reports don't serve an obvious purpose. More, the harm to consumers done by the FHA loan reject reports seems obvious. Yet it may be that the impact of FHA rules on lenders is a bigger problem.
Loans that do fit the FHA guidelines but are nonetheless stigmatized by the FHA reject report fall into a zone that few lenders will enter. If the reason for the first denial is not addressed and a second government lender extends credit, the FHA can deny a subsequent claim. The second lender must assume that, in the event of default, the rejected FHA loan will be audited by FHA, delaying any reimbursement and increasing the cost of the loan.
"For this administration in particular, they all talk a big game about access to credit for minorities," former MBA Chairman David Stevens told NMN last week, "and yet challenges like FHA reject reports can make it literally near impossible for lenders to try to support that objective without significant risk."
Stevens argues that the solution to the problem of FHA rejects is to end the penalties on lenders who approve a compliant borrower that was rejected previously. Why should we penalize lenders, he asks, who use the full credit box of the FHA to approve a borrower that ought to have been approved the first time around?
"How can an agency such as FHA, which says the mission is 'to create strong, sustainable, inclusive communities and quality affordable homes for all, allow mortgage credit rejects to exist at all," asks the CEO of one large IMB. "How do we say with a straight face that we as an industry are focused on 'inclusive' lending practices when we tolerate the existence of FHA rejects?"
Good questions. Meanwhile, the FHA ought to suspend the use of call reports for rejected FHA loans until the quality and consistency of the data gathered about consumers is brought up to modern reporting standards. The current FHA call report system is an embarrassment and ought to be suspended forthwith by HUD Secretary Marcia Fudge.
