High credit standards have reduced access to credit, according to a blog post by Laurie Goodman from the Urban Institute. Since 2009, 6.3 million fewer loans have been made, and as much as 1.1 million fewer loans were made in 2015 than would have been if credit standards from 2001 were still in effect.
The Urban Institute states that lenders are imposing even more stringent standards than those required by the entities that guarantee or insure these loans: Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). While these institutions have been successful in reassuring lenders that they will only be liable for underwriting errors and not whether the borrower defaults, originators still drive business away with concern that the costs of producing and servicing risky mortgages are higher than what they could earn on the mortgage.
The GSEs and their regulator, the Federal Housing Finance Agency have clarified when lenders will be held accountable for defects, as well as defined the penalty for specific defect types, and it has been more successful in this than the FHA. Additionally, they have moved the loan review process up to shortly after acquisition, so that lenders can know immediately if defects have been identified.
According to Urban Institute, the FHA has more power to increase credit access. The GSEs do risk-based pricing through their loan-level pricing adjustments. However, the FHA does not do risk-based pricing, and so it has insured borrowers and so it has insured borrowers with less-than-pristine credit. Charging the same fee for those with good credit as those with bad credit has limited credit availability. GSE mortgages with a down payment of less than 20 percent of the loan amount must also obtain private mortgage insurance, which varies in price depending on risk. FHA loans are therefore much more attractive for borrowers with low credit scores.