In this new world, available credit is shrinking, making it much more difficult for non-A-paper borrowers to obtain mortgages. Not only does this exclude a number of worthy borrowers, but it also shrinks the market for any number of mortgage lenders – especially those involved in government-backed lending programs.Â
However, one could argue that there is much more available to lenders willing to do a bit more. Indeed, a case could be made that originators involved in government-backed lending programs have an obligation to look beyond the FICO, and go beyond the computer-generated profile to serve a wider class of borrowers.
A lower-than-average FICO score does not necessarily mean a borrower is an unworthy risk. There are many valid circumstances that could temporarily drive the otherwise-stable borrower out of the ‘safe zone’ of automated underwriting.Â
Additionally, there are a number of programs, originally designed for people who could not otherwise afford a mortgage, that have become mainstream products. In many cases, applicants for whom these products were originally intended are increasingly being rejected primarily for their FICO scores.
We still hear from the Washington political elite that the American Dream should be available to hard-working Americans with justifiable or understandable blemishes on their credit ratings. And yet, increasingly, those consumers are being excluded from consideration for mortgages.
There is an underserved customer, as well as a very promising, untapped market segment, available in the form of the working class American. These are the people who generally seek loan amounts under $150,000, with FICO scores that do not necessarily put them into the A-paper category. Just because a borrower doesn't fit into a neat bucket or category doesn't mean he or she isn't a worthy investment. But that borrower does not fit the model for most workhorse loan products – they don't quite make it into the algorithm.
When used as a volume product, any number of government-backed loans can create a serious imbalance between larger lenders and smaller ones. Some national lenders, because they have the capability to originate and manage a huge number of government-backed loans, can afford to be more selective in their approval processes. While a large national mortgage company may be perfectly capable of accepting applicants with credit scores around 700 and still maintain its numbers, smaller lenders must still target borrowers with lower average scores in a shrinking customer pool.Â Â
Of more concern is the fact that many larger lenders are now unable to take the time to underwrite their loans (used in volume) the way they were once primarily underwritten: manually. It is more cost-effective for companies closing hundreds of millions of dollars monthly to work with credit scores closer to 700 and base those loans upon credit scores and desktop underwriting engines. The result is fewer and fewer mortgages for borrowers without the very best of credit histories.Â
The underserved working class consumer is someone willing to do whatever it takes to stay current on loan payments. That person may not have the perfect FICO score – perhaps he or she has had health issues, a divorce or a similar life occurrence that resulted in a damaged credit rating. Does this make the borrower unreliable? Only to the volume lender pushing through loans in bulk.
As more and more varieties of loan products become tools used to entice A-paper customers, they also become less and less available to the people for whom they were originally intended. Undoubtedly, the economic events of the past five years have spurred an industry-wide re-examination of lending and underwriting processes, and rightfully so.Â Â
Yes, the industry is facing increased regulatory scrutiny and is charged with the task of ensuring that what happened in 2007 and 2008 never happens again. But more needs to be done than increasing requirements on credit scores or tweaking the proverbial algorithm. Quantification and automation have their benefits, but they cannot be used without being combined with common sense. Â Â Â
Like it or not, the time has come in our industry to improve the coordination of government-backed lending endeavors by bulking up our manual underwriting resources. Obviously, this involves an up-front expense in manpower, auditing and training – clearly, it is not as neat and easy to measure as computer software.
However, that up-front expense can, in the long run, decrease risk and reduce the costs associated with toxic loans and defaults. Common sense underwriting can see things that software will regularly miss. More importantly, it provides a trained eye and another level of quality control. Quality assurance is not always the most exciting element of growth, but it is a very real factor.
To be sure, not every American is entitled to a home or a mortgage. But to make the mortgage the exclusive domain of the elite takes us to a very dangerous place. An entire class of potential home buyers is losing out, left behind by the government-backed loan programs designed to help them in the first place.
Andrew Peters is CEO of McLean, Va.-based First Guaranty Mortgage Corp. He can be reached at firstname.lastname@example.org.