Source: Bonnie Sinnock, Capital Markets Editor, National Mortgage News
The Federal Housing Administration is doing away with a requirement that's been challenging mortgage borrowers and lenders since 1990 in an apparent response to extraordinary affordability concerns and recently renewed calls for an end to the policy.
Changes to FHA procedures and technology effective Monday are aimed at removing the Mortgage Credit Reject requirement, which had been a hurdle for some first-time homebuyers with lower incomes.
The Department of Housing and Urban Development affiliate's revisions specifically remove a warning flag that gets temporarily assigned to borrowers after any lender offering FHA-insured loans denies them.
"This really benefits applicants who may have been rejected by a lender or lender's own internal policies. It should make it a lot easier to be qualified by another lender," said Peter Idziak, senior associate at mortgage law firm Polunsky Beitel Green. Lenders should no longer see or have to use the Mortgage Credit Reject screen they previously used to enter information about denials starting Monday, according to an FHA information bulletin. The FHA recently added a waiver for the requirement.
One reason FHA officials likely removed the MCR indicator was because each individual lender can reject an insured loan for idiosyncratic reasons they apply on top of administration's prerequisites.
"This was a requirement to report even when the borrower would have met FHA requirements, but was rejected because of the lender's overlay," Idziak said.
Another reason for removing the Mortgage Credit Report flag is that, while tracking denials does play a key role in the housing finance and credit analysis, other vehicles record that information in less disruptive ways. Home Mortgage Disclosure Act and credit reports will still have the data.
The FHA Connection system indicator, which was associated with both the insurance case number and applicant for a six month period, had more of an impact on borrowers applying to other lenders than HMDA or credit reports because it signaled the need for reviews.
"It's a slowed-down process," Idziak said of the reviews required for flagged loans, which could deter the new lender. As a result of them, "you could be shut out of FHA financing, even though if you've gone to another lender first, they might have approved you," Idziak added.
Another thing that may have made the change compelling has been consensus on it among groups sometimes at odds on housing policy matters.
"It's not just been supported by lenders, but also consumer advocates," said Idziak.
Among industry voices who have recently pushed for the end to the requirement are consultant David Stevens, a former FHA commissioner and Mortgage Bankers Association CEO, and Chris Whalen, an NMN columnist and analyst who previously worked for Kroll Bond Rating Agency. Consumer groups like the National Community Reinvestment Coalition also have long pressed for more access to FHA loans, and originally even challenged the existence of overlays at one point.
The runup in interest rates that's left the cost of housing relative to income the most expensive it's been since 1984 has many stakeholders in the mortgage industry taking a closer look at any policy change that could help address that challenge.
"Regulators have generally mentioned that affordability is a major concern so I would venture to guess that they might have looked around and said what can we do to help borrowers to help make homes affordable?" Idziak said.