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Tackling Restricted Credit Availability

UnderwritingThere are many things to like about the current real estate market, including broadly rising home prices and interest rates that remain well below 5 percent; but in many ways challenges remain.

For many potential buyers the attractions of homeownership are simply off limits. According to the Urban Institute, “the mortgage market operated under reasonable standards in 2001. Using the standards from that year for comparison, we know that the increased reluctance to lend to borrowers with less-than-perfect credit killed about 6.3 million mortgages between 2009 and 2015.”

Restricted credit availability is the central challenge facing the lending community. No doubt there should be solid underwriting standards, but is it really possible that more than six million people with historically-good credit levels can’t get a mortgage?

A significant number of worthy borrowers are being left out, and they’re effectively being denied access to the American Dream. Our solution is to speak with borrowers, to listen, to seek out the underserved and to see if there’s a particular QM or non-QM option for each borrower that makes financial sense. Today, many solid, responsible borrowers don’t have 740 credit scores, but they make a point of paying their mortgage on time and in full. Should lenders automatically turn away such prospects? Certainly not.

We are now seeing more borrowers with higher credit scores. What’s happened is that the borrowers are the same, and although their financial habits are generally unchanged, their credit scores have improved because of needed reforms in the credit system. Things like credit dings for traffic tickets and unreturned library books are gone. There’s now a 180-day “waiting period” that gives time for consumers and insurance companies to straighten out medical bills. Tax liens and judgments with insufficient documentation no longer appear on credit reports.

In practical terms, many potential borrowers who were once “off-limits” now deserve a second look.

According to the Federal Reserve Bank of New York, between June 2017 and June 2018, “the number of individuals with a collections account on their credit report fell from 33 million down to 25 million. The number of collections accounts reported also dropped substantially, from more than 66 million collections accounts at the end of the second quarter of 2017 to about 47 million appearing on credit reports in the second quarter of 2018.”

Not all of the consumers with improved credit scores now qualify for mortgage financing, but the important point is that some do. The New York Fed estimates that “20 percent of the individuals with scores under 620 saw enough of an increase to lift them above the 620 mark.”

We cannot ignore these new prospects.

A second industry challenge involves the slowing market. With fixed costs, tight margins, rising rates, and less refinancing, the result is smaller volumes, fewer offices and lower profits per loan. But now is not the time to retreat. A tighter market means reducing redundancy, increasing productivity, and focusing on the right production mix.

If you’re in the mortgage business now is the time to stand up, stand out and create a better experience for your customers.

About Author: Ray Brousseau

Ray Brousseau, is President, Carrington Mortgage Services. With nearly 30 years of experience in the mortgage and banking industry, Brousseau is responsible for overseeing all aspects of Carrington’s lending and servicing divisions, from origination through fulfillment, as well as servicing operations. Under his leadership, the company’s full-service mortgage lending business with wholesale, retail, and centralized sales and operations has experienced unprecedented growth and operational results.
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