Agency FICO Redline? - A Question to Ask

Bruce Krasting's picture

The US Treasury Department’s Christmas Eve announcement confirming
massive new support for the Agencies had the following as the last

"Recent announcements on the tightening of underwriting
standards by Fannie Mae, Freddie Mac, and the Federal Housing
Administration, demonstrate a commitment to prudent housing finance
policy that enables a transition to an environment where the private
market is able to provide a larger source of mortgage finance."

I believe that this is a very mistaken assumption by Treasury. Take
them at their word on this regarding the tightening of standards. I can
confirm that all of the Agencies have “independently” (Every thing is coordinated in D.C.)
announced that they are tightening standards. It is impossible to
quantify that promise at this point. I believe there is some teeth to

However there is no connection to the actions by the Agencies and an
increase in lending by the “private market”. That is not going to
happen. Does Treasury really believe that Citi Bank and Wells Fargo are
going to be making cheap mortgage loans to those who have just been ‘red lined
by the new tighter standards? If private lenders are to be involved it
will be on terms more stringent than those new standards being set by
the Agencies. The pricing will be much higher as well. Bank of America
will not be making sub-standard/mispriced mortgages any time soon.

If you take these two pieces together you would have to assume that as
a consequence there will be a significant contraction in the
availability of mortgage credit. Its impact should be being felt right
about now. We will find out if this is a factor in two to three months
when the backward looking housing numbers are released. I would like to
know the answer to this question earlier.

I know that there are many out there who are involved with mortgages
and real estate. In order to get a reasonable handle on this we need
regional input. People who actually have their boots on this ground. So
I ask these questions to people who might directly or indirectly know
the answers:

Has there been a tightening of standards? Are mortgages more difficult to obtain in the last 30 days?

If the changing standards are in fact constraining mortgage
availability the consequences would be significant. It would open a
window into those housing numbers that are coming out in February. We
all need an edge.

It would also be very interesting to hear that there was no change in
availability or in lending standards. That would be an observation for
Treasury and the Agencies to ponder. They read too.

This could be one of those “one hand clapping” things. Just an experiment. Blog economics.

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Kid A's picture

Any tightening of the formulaic scorecard part of mortgage lending will have a big impact. 

As the credit card companies keep cutting credit lines and close inactive accounts the average FICO for the country is going down as % utilization and % of trades open, oldest open trade, and other factors that contribute to FICO scores are impacted.

This will push more borrowers into more expensive products if they want the loan (increasing the monthly payment - lowering the price a consumer will be willing/able to pay).

Rainman's picture

In SoCal, midrange and jumbo foreclosure deals are being suppressed primarily by low ball pricing offers on shorts and I suspect it is also about the seasonality of these deals. The banks are hoping they'll get a better volume of workable offers by hanging on til Spring. Maybe they are right, but let's not overestimate the intelligence of the banksters.

And , of course, a 20%+ down is a real stumbling block for first-timers at a $100k + entry level and the move-uppers are basically stuck where they are without fire sale pricing their current residence, assuming it is fat with equity.

My banker pals tell me the game is now about "acceptable" offering prices and high cash down deals for the mid/upper addition to the other credit requirements of FICO, income, etc. So the buyer must bust through a lot of roadblocks, and that ain't easy to do for many.

In the non-banker world, nobody I talk to believes the price offering environment will favor the banks in 2010. Most believe their expectations will be shattered by mid-year.

Anonymous's picture

By "lending standards" do you mean that the Average American might actually have to SAVE UP FOR A 20% DOWNPAYMENT?

After what's happened, why any investor would buy any loan where the borrower doesn't have "skin-in-the-game" and less than 30% DTI is beyond me. Just another wave of walk-aways, otherwise.

It's about underwriting. It's ALL about underwriting. Lenders/Investors want to be paid back. PERIOD.

Get used to the 'Old Normal'.

Anonymous's picture

i have been looking at some land deals [forclosures] recently and the realtors have all said the same general thing.."we will know more after the first of the year" of the realtors even said he had been told by the bank to expect a flood of properrties after jan.1

Rage of Odin's picture

I just had breakfast with a real estate agent that works with a large bank selling their REO's. They told him that a flood of houses will be back on the market after Jan 1. They had slowed to a trickle the last 3 months, also almost every lender is requiring a 640 FICO score after the Jan. 1, up from 620 and that is with FHA backing.

Anonymous's picture

i live in a high net worth zip code 33480 and was intrigued a month ago by sub 4 percent jumbo arm. At first I thought it was too good to be true, but after spending substantial time with ING Bank, the lender, on documentation, they never followed through on appraisal. Credit score fine, ltv less than 40 percent, income coverage fine. They have not said no but seem to have frozen appraisal process. My conclusion is that something in their world changed in last thirty days.

on i

Anonymous's picture

I own a RE company and we have a mortgage operation in my building. These guys are 20+ year pros and didn't swim in the subprime fraud sewer.

There is no doubt that mortgage qualification is harder, tighter and more fraught with tedium now than even 30 or 60 days ago. We work with close to 20 investors, and it's obvious they don't want to lend. Agencies are toast, and FHA is the only viable route we can take for 90% of our business.

Our business went back to Winter '08 levels on Nov. 1. All the demand spurred by the tax credit dried up and has not come back. IMO, all the potential future demand has been brought forward.

I also believe the new TIL/RESPA regs will further dampen loan originations. They are an absolute minefield and seem to have been written with suppression of loans in mind.

Anonymous's picture

If Acorn gets it's funding back all bets are off.