“This tightening of access to credit stems not from a contraction in the credit boxes of Fannie Mae or Freddie Mac or the Federal Housing Administration (FHA
), but from lenders applying tighter credit standards within these credit boxes,” wrote Laurie Goodman of the Urban Institute (UI) in a new report.
UI noted that although credit remains tight, its underlying factors are improving. The median credit score has risen from 701 in 2001 to 743 in 2014, and the new Housing Finance Policy Center Credit Availability Index, which tracks the share of loans that are expected to go 90 days delinquent, has fallen from 17.4% in the fourth quarter of 2007 to 5.7% in the fourth quarter of 2013.
The penalties resulting from not meeting the GSE and FHA
timelines, along with restrictive and old-fashioned limits on foreclosure expenses, create uncertainties that are difficult to quantify and price for, according to Goodman.
“The heightened and uncertain cost of servicing delinquent mortgage loans is a significant, although underappreciated, constraint on access to credit," Goodman added. "Lenders can price loans to reflect the anticipated servicing costs, but it is very difficult to price for the uncertain costs of default servicing."
Data from the Mortgage Bankers Association shows the costs of servicing delinquent loans are much higher than the costs of servicing performing loans. In 2013, the annual cost of servicing a nonperforming loan was on average 15 times that of servicing a performing loan—$2,357 versus $156.
The result of the increased cost is lenders forgo lending to borrowers more likely to go delinquent, wrote Goodman. “The FHFA has made great strides with recent changes to compensatory fees, but more needs to be done,” she stated. “Servicing delinquent FHA
loans presents an even greater challenge. To expand the tight credit box, these servicing issues must be addressed.”
Other factors are also causing lenders to apply these credit overlays, including uncertainty over when and why the GSEs or the FHA
will put the credit risk of a loan back to its lender for violating their underwriting or servicing rules and the heightened litigation and related reputational risk, according to UI. Goodman’s report focuses on the high and variable cost of servicing delinquent loans.
Mortgage credit is too tight, as many experts have been pointing out for some time, and a new report from the Urban Institute suggests the uncertainty around servicing delinquent mortgages may be to blame.