In theory, lenders are generally receptive to regulators' calls for broader consumer access to credit, but they're also concerned about the increased risk it might entail.

Regulators and lenders have been wary of broadening credit ever since lending standards loosened severely during the run-up to the housing crisis, resulting in scads of borrowers with loans they couldn't afford.

In a Sept. 16 speech, Julian Castro, the new Secretary of the Department of Housing and Urban Development, said lending standards have become too tight and called for changes that would expand homeownership opportunities. Now he faces scrutiny over how this can be attained without credit quality declining.

"That's a great question. I think that's right at the heart for folks who wonder, why would we promote homeownership now? They associate it with what happened before," he said in a speech at a Ginnie Mae meeting in Washington on Sept. 22. "The first thing I would say is I believe controls have been put in place on both sides — on the lender's side and on the public's side — since then, and that the pendulum has just swung too far in the other direction."

Castro, in addition to reiterating comments from his previous speech about average borrower credit scores for government loans being too low, said evidence of this lies generally in the level of overlays or additional underwriting criteria lenders put in place beyond those required by government programs.

Current credit overlays are not only stricter than they were precrisis, but are tighter than they were 15 or more years ago. "The issue is how do we achieve a balance?" Castro said.

"How do we ensure that the lessons that we learned over the last few years are utilized so that…folks that have demonstrated a decent track record and who in normal times would get a loan are able to do that?" Castro added. "There are millions and millions of Americans who fall into that category who right now don't have access to credit and we want to change that in a responsible way."

Castro also addressed questions about whether anything could be done to alleviate penalties on Federal Housing Administration lenders for small, "check-the-box" errors on otherwise well-underwritten loans that discourage broader lending.

"There are always two things we have to get right; usually it's form and substance. But you don't want the form to be so draconian that it really gets that it injures the substance," he said.

"In the wake of the crisis, we've seen a lot of frustration from lenders when it comes to their FHA business," Castro said. "Many have been reluctant to lend because they fear unanticipated consequences. They need to be able to manage their risk better and so does the FHA."

Castro reiterated past FHA promises to address this concern through measures such as an overhaul of the agency's single-family handbook that will condense its 900 mortgagee letters and other policy guidance into a single document.

 

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