We broke the news about the eventual reinstatement of Nehemiah Down Payment Assistance Program, back in August and way ahead of Inman News, on Bloodhound Blog. How did we know where this was headed? We talked to lenders rather than the charitable organizations. We talked to lenders because we know the Golden Rule; he with the gold makes the rules.
The largest lenders in our nation were consulted when Chairman Frank and Secretary Preston were playing political chicken. Reinstating a program makes no practical sense if you can't get lenders to lend. In fact, statistics from the largest loan servicers and originators will weigh heavily in the ultimate decision. The biggest loan servicers and loan originators found some interesting facts about credit scoring and loan performance.
These large loan servicers said that seller-assisted down payment assistance programs were defaulting at 2-3 times the normal, acceptable default rate. I can't verify that; the data aren't published but that's what the senior credit officers at our nation's largest loan originators tell me. More importantly, that's what the large loan servicers have been telling Congress (and HUD) for the past year. The fear of an unacceptable default rate drove HUD to speculate that the increased defaults could bankrupt the FHA insurance system...so they screamed.
I reported that Chairman Barney Frank was holding risk-based pricing as a chit for the ultimate reinstatement of seller-assisted down payment assistance programs. He had to get the lenders to play ball. The largest lenders, then, are the most-likely candidates to determine the viability of these programs.
What the lenders learned, when they ran modeling tests, was that the performance of these loans improved EXPONENTIALLY when a minimum credit score was introduced, along with strict adherence to the debt-to-income ratio. A miimum credit score of 680 reduced the default rate below the acceptable universe for FHA loans. A minimum credit score of 620 dramatically reduced the default rate but it was statistically indeterminate if it was acceptable.
- Borrowers with credit scores from 620 to 680 could be subject to higher insurance premiums. (I personally wouldn't have a problem with this)
- Borrowers with credit scores below 620 would be banned from using the down payment assistance program until mid 2009. ( I truly think that we could improve on this one. First off, why down to 620? Secondly, even people with credit scores of 570 or such can still have decent credit, under FHA's credit guidelines.
The answer to Jeff's questions are "that's what the large lenders want". They want that 680 minimum because they KNOW the default rate is acceptable there. They want to phase in the 620 minimum because the data are inconclusive about the performance at the lower credit score threshold. They spurn the 570 credit scores because allowing them will bankrupt the HUD insurance fund...and NOBODY wants that.
Getting lenders to lend is the answer to the mortgage liquidity crunch. Enacting legislation does no good if the lenders won't play ball. Remember the golden rule; he with the gold makes the rules.
If you're interested in the new minimum loan guidelines that we expect the saved down payment assistance programs to have, you might attend our free teleconference next week. Sean Purcell and I will discuss these developments next Monday, at 4PM PST, on Bloodhound Blog Radio. We’ll give you a heads-up on what the credit-score minimums and debt-to-income requirements might look like.