Our friends at CoreLogic have asked two good questions in a blog this month.
First, why so few loan applications by borrowers with low FICO scores today compared to 10 years ago? And, if credit is tighter today than then — as it is, by all testimony — why has the rate of decline of applications fallen?
The answers lie mostly in regulatory space, and only a small part in changes in the lending marketplace.
What’s CFPB got to do with it?
The arrival of the Consumer Financial Protection Bureau (CFPB) in 2009 has been tough on us. And of course, lenders deserve tough. But neither we nor consumers deserve ongoing punishment for a credit bubble which ended completely in 2008.
The CFPB is an energetic enforcer, and even more threatening than enforcing. One of its first tries was to change the loan application process to make it more thorough (fine), timely (fine), and with elaborate new documents setting lender rate and fee quotes in concrete.
As everyone in the real estate industry knows, even honest lenders struggle in concrete because home purchases and financial markets change so fast.
Nevertheless came from CFPB a 2009 Good Faith Estimate, three pages of total confusion, and on-pain-of-death demand that it be sent to borrowers within three days of application.
Borrowers didn’t want, like or understand the new GFEs, which became an opportunity to spend hours explaining that borrowers didn’t have to do anything with the GFE and we weren’t trying to trick them into something. TRID (TILA-RESPA Integrated Disclosures) since fall 2015 is, of course, far worse.
The prisoners have resisted. If I don’t have an application, I don’t have to send anything.
A new definition of “application”
The CFPB countered with a new definition of “application,” an interpretation of the Real Estate Settlement Procedures Act (RESPA) leading to the “RESPA Six.” If a lender has these six pieces, then disclosures must be sent to the borrower — a substantial bureaucratic effort by the lender and little use to the borrower, or even alarming to the borrower:
- The consumer’s name
- The consumer’s income
- The consumer’s social security number to obtain a credit report
- The property address
- An estimate of the value of the property
- The mortgage loan amount sought
Lenders since have done acrobatics worthy of Cirque Du Soleil to avoid having the sixth piece. Any five, but not six. Get good information to the borrower, but don’t start a bad process, and stay clean with the CFPB.
So, all over the country we have crazy conversations in which the lender avoids income or address, yet runs a credit report. As soon as a lender knows that an applicant’s FICOs are off the bottom of the approvable range, end of game. No “application” taken or reported.
However, prior to 2009 there was no CFPB swamp to avoid and many low-probability applications were created, and reported, but soon shredded.
All of that created an imaginary decline in low-FICO applicants, just because of overdone regulation.
Why fewer denials in underwriting?
So, how come fewer denials in underwriting? Partly the pattern above, which has quickly screened-out the non-approvable, fewer applications for underwriters to have a chance to deny.
But another element has changed since the heat of the bubble: In 2005 we had a zillion ways to put a loan together. Especially weaker salespeople with few applicants would flog them through one loan type after another, trying to find one which could be approved and still have rate and terms acceptable to the borrower.
[Tweet “In 2005 we had a zillion ways to put a home loan together.”]
Fannie? No. Alt-A? Which kind? 80-20 100 percent loan-to-volume (LTV) with prepayment penalty? Still no. How about NINA (no income no asset) 2/28 subprime ARM (adjustable rate mortgage) with prepayment penalty, negative amortization and 1.25 percent one-month teaser? There we go! And foreclosure a mere 18 months away.
But, one applicant generated maybe five underwriting declines and then, finally a suicidal approval.
Today’s product array is very limited. We might try Fannie and then default to FHA, but the whole alternate universe is gone.
Oh, how very broad the land of unintended consequences!
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
