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Brion Crum's Blog

By Brion Crum | Mortgage Broker
or Lender in 85259

Stricter standards by Fannie and Freddie push lower credit scores to FHA loans


By Brian Collins with Origination News

The tightening of credit standards over the past few years is making it tougher for many residential borrowers with average credit scores to get financing to purchase a house.

Only 11% of Fannie Mae and Freddie Mac loans go to borrowers with 620-700 FICO credit scores and only 22% of the loans they buy from lenders provide purchase financing for homebuyers.

The Federal Housing Administration has become a haven for most homebuyers, particularly first-timers.

In the first quarter of this year, Fannie and Freddie combined purchased 184,500 single-family loans that financed homebuyers. FHA insured 245,600 such mortgages.

But even FHA lenders have tightened their requirements due to shaky house prices, high default rates and loan buybacks.

The credit scores on FHA single-family loans have risen steadily over the past few years. The average FICO score hit 689 as of September 30 (the end of fiscal year 2009), up from 628 in FY 2007.

Lenders originated a record $328.1 billion in FHA-insured loans in FY 2009 with 44% of the loans having FICO scores above 680. Only 13% of FHA borrowers had FICO scores below 620, which is generally considered subprime.

This year, 58% of FHA loans have FICO scores above 680, according to FHA consultant Brian Chappelle.

He noted that loans for borrowers with 620-680 credit scores have been good business for FHA and he is concerned about a drop in lending to these borrowers. "We need those loans to help with the housing recovery," he said. "If FHA is not doing a significant number of loans to credit worthy borrowers with FICOs below 680, no one is."

Fannie Mae and Freddie Mac, which were placed into conservatorships in September 2008, have tightened their credit standards and imposed extra fees (known as loan level price adjustments) on loans.

Treasury secretary Timothy Geithner recently told a congressional panel that Fannie and Freddie are being managed much more conservatively now.

"At our insistence, they have put in place much more conservative underwriting standards. They are charging more for their guarantees to remedy some of the mistakes they made earlier," he testified.

The first quarter financial reports released by the government-sponsored enterprises shows the average weighted credit score of Fannie loans was 758 and 751 for Freddie. In 2008, these GSEs had an average credit score of 728.

That may not seem like a large increase in credit scores. But in scramble to higher quality, Fannie and Freddie loans to borrowers with FICO scores between from 620 to 700 has fallen to 11% in the first quarter from 25% in same quarter in 2008.

Federal Housing Finance Agency deputy director Chris Dickerson pointed out the GSEs are being funded by the U.S. Treasury and the conservator has a mandate to minimize losses.

"Most taxpayers would not be upset to know that credit standards have been tightened," said the deputy director for enterprise regulation.

It is not that Fannie and Freddie don't offer loans to borrowers with 620-700 credit scores, he said. But the GSE loan level price adjustments in that FICO range "make it more attractive to go to FHA."

The GSEs also require larger downpayments than FHA but Fannie and Freddie require private mortgage insurance on any loan where the downpayment is less than 20%.

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