The National Association of Realtors recently suggested that if the credit scores required for a mortgage returned to the more normal levels of about 720 for conventional loans and 660 for FHA loans, home sales could be 15 to 20% higher.
But virtually all loans with a FICO score below 660 are subprime ones insured by the FHA. FHA’s underwriting standards expose these homebuyers to a high risk of foreclosure.
Calls for an expanded credit box have been made for decades by Realtors, homebuilders, and other groups desiring to debase traditional lending standards in order to increase subprime lending. For example, in 1999 the Urban Institute released a HUD commissioned report entitled “A Study of the GSEs’ Single-Family Underwriting Guidelines”:
Almost all the informants said their opinion of the GSEs has changed for the better since both Fannie Mae and Freddie Mac made substantive alterations to their guidelines and developed new affordable loan products with more flexible underwriting guidelines…
Informants did express concerns about some of the GSEs’ practices. The GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities
Translation – do away with common-sense lending standards and ignore the consequences for both working class and all homeowners. These calls for expanding subprime lending fly in the face of one immutable fact: the safe operation of the US mortgage market over the long-term is dependent on the preponderance of loans being prime—loans with a low risk of default under stress.
