There is a concerted push by the government to ease up on credit to borrowers.

The government is
concerned that lenders have gotten to strict in their lending and that has hurt the ability of individuals to get
loans.
On the flip side, the government has imposed very serious and high financial fines against lenders for
lending parameters that the government feels contributed to the economic crisis in 2009 Looking forward,
agencies like HUD is demanding that lenders indemnify them against loans that they feel are lacking
sufficient documentation.
So, lenders have A. Cut lending for FHA borrowers. Some lenders have reduced lending by 80%. B.
Increased minimum credit scores to 680. C. Required more documentation. As a result, defaults on loans
have decreased and loans that once were of sufficient size now take the form of two trees and multiple
folders to hold all the original documentation and supporting documentation and proof of the supporting
documentation, and disclosures, and re-disclosures, and dates and re-signed and dated forms, et al...
The Funding Source Syracuse never lent to borrowers with lower credit scores, always fully documented
the files and made sure all loans conformed to regulations. This is the norm for all lenders. It's how
lending has transformed.
Yesterday, the Wall Street Journal (WSJ) reported that Ben Bernanke was denied by a bank for a
mortgage. He cited this as an example of how far lenders have swung to being conservative in their
approach.
The reason he was declined, as reported in the WSJ, was because he recently left his full time salaried
position for basically self-employment in a different field. The rules imposed by the US Government
agencies on lending (Fannie, Freddie, FHA, VA, et al) require that a bank can document that someone has
consistent income. If they recently changed jobs and are now for all intent purposes self-employed, there is
no way to argue that this income will continue. This is a solid rule for the average borrower. Clearly,
Bernanke is not an average borrower and one can successfully argue that he will pull in an astounding
amount of money just giving paid speeches that will more than support his mortgage payment. However,
this rule applies to all. And, you can't make that type of exception without being accused of A. Not
conforming to the rules of lending imposed by the government and B. Discrimination.
The Funding Source in Syracuse frequently ran into such cases that on face value made no
sense. However, Phil LaTessa Syracuse worked hard to insure that The Funding Source under Phil
LaTessa guidance complied with lending laws, rules and regulations. Period.
Lenders today are subject to intense scrutiny by HUD over the quality of their loan documentation. And, by
regulators over something called lending to borrowers who ONLY have the "ability to repay" the loan - as
defined by a rule called the "Ability to Repay" or a "Qualified Mortgage".
Yet, at the same time, they want lenders to open the door to more borrowers. Every day there is a drumbeat
in the press about increasing lending.
But, at the same time, if a lender gives a loan to a borrower, the regulators will rip the loan apart to kick it
back or sue the borrower if the borrower defaults and the loan comes under greater scrutiny. In fact, FHA
has come out with layered lending guidance that combines down payments to credit scores. In broad terms,
the lower the credit score the higher the down payment.
So where are we going? This almost seems counter-intuitive to have government leaders and policy makers
push for increased lending while regulators (some of whom don't understand lending, literally) push to
punish lenders and prosecutors push to sue lenders.
It would be great if lending could go back to where it was before former president Clinton pushed for
increased home ownership and lending rules loosened up to meet that criteria. It was simple then - you lent
within specific percentages of a person's income and debt to make sure they qualified, houses were not
exploding in value and people did not lie on loans. It seemed the sanest and safest part of banking to be
engaged in. Then we moved to "expanded criteria" lending to increase the amount we lent to borrowers,
and moved onward to Low to Moderate Borrower lending (in return for the federal government handing out
more CRA credits to banks, which are highly coveted by them), then we moved to "no income verification
loans" for self-employed borrowers only, then to "non traditional credit" for some borrowers based on the
rationale that they had limited access to credit and that should not be held against them (shouldn't they go to
a local HUD Office and take a course on buying a home and establishing credit? Nope, not fair they said),
and then we were on our way to no income verification for everyone who had cash and we didn't care
where the money came from. We know where that led to. A collapse. And, this was pushed by the
demand that we increase the amount of people who own homes.
As a result, lenders paid a heavy price. And, there is no defending some of the sloppy lending patterns and
the push by some to increase lending to increase income, some who used fraud to lend. But, there were
many borrowers and others who wanted in to make a quick buck and they committed fraud by lying on loan
applications and getting loans they could not afford. This mix was toxic
For the most part, lenders paid the price for this crisis. And, some individuals also faced the music. Others
were victims - borrowers and lenders and others - who lost substantially in the mess.
The result is that lenders who are lending have found that borrowers with a 680 credit score are less likely
to default and they want to know who those borrowers are, get full background checks on them, and make
sure they have stable income to support the payments. In addition, because the government is pushing it,
lenders are over documenting files to death to protect themselves against lawsuits by borrowers and
regulators
Seems rational. Anyone would respond this way.
It seems that if the government wants quality loans that are performing for the most part (as they should
want) they should re-visit the rules they put in place before drumming up the demand to loosen credit. And
make a decision as to what they think they would want with the understanding that individuals with lower
credit scores do tend to default at higher rates, in general.