Are Relaxing Mortgage Underwriting Guidelines a Good Thing?

The pendulum for mortgage underwriting at one time back from the late 1990’s to the latter part of 2008 was way to far on the side of easy credit. Many joke that if you could “for a mirror” you could qualify and obtain a mortgage to purchase a property. We all know where those mortgage underwriting guidelines led to, the most severe economic crisis of the modern era. Hoepfully as an industry and a nation we never want to retrun to those lax mortgage underwriting standards.

Unfortunatley it seems in the quest to maintain profits and market share some of the Too Big Too Fail Banks may be going back down this path that will ultimately lead to yet another mortgage and housing crisis. There have been several reports in the meida that Wells Fargo, the nations’s largest mortgage originator is putting its’ toes in the water to “Check The Tempature”.

Here is a recent article from our friends at Mortgage Professional America:

Could mortgage lending standards finally be starting to ease? Wells Fargo seems to think so. The big bank has announced that it will lower its minimum credit score for certain government-backed mortgages.

Wells Fargo will begin origination Federal Housing Administration-backed purchase loans for borrowers with credit scores as low as 600, the Journal reported. The bank previously had a limit of 640 through its retail channel. Borrowers with credit scores below 620 are usually considered subprime.

“The goal is to increase access to credit – especially for low- and moderate-income borrowers and first-time home buyers,” company spokesman Tom Goyda told the Journal. “These are fully underwritten, fully documented loans, consistent with FHA program guidelines and responsible lending principles.”

Industry analysts have predicted that lenders may ease credit standards this year, since stabilizing home prices and falling refis have left banks hunting for new business, the Journal reported.

Wells has tried easing credit standards before. In 2011, the lender said it would start accepting mortgage applications from borrowers with credit scores as low as 500, though the minimum was later increased to 600 and then 640, the Journal reported. The company was also sued in federal court in 2012 over allegations that the bank was “reckless” in its FHA lending. Wells is fighting the suit, according to the Journal.

The pendulum over the last five to six years may have swung too far in making it difficult for solid borrowers to obtain a mortgage, but that is no reason not to swing back to the perilous past of the subprime mortgage debacle.

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