We have been looking back lately at the Portland Housing Center. That’s what happens when you’re 20 years old and about to be an ‘adult’. In the course of it, I have reminisced about how people couldn’t get bank loans in inner NE Portland because a practice by banks was not to make loans for less than $50,000. The catch was house prices averaged about $35,000. So a lot of people said redlining and a lot of people were shamed and the Portland Housing Center was created.
In our early years, we spent our time telling people they could buy homes and here is how to do it. We worked with committed loan officers, who also had to explain these were good borrowers and good loans, these community loans. Then in our teen years, a hullabaloo of lending took off, so we started telling people that not all loans are good, even if you qualify. We wished for shame to happen again but the greed in the marketplace was stronger. A lot of people got loans that never should have been made.
Now the lenders who made some of those bad loans have flipped their practice. They make loans but only if there is very little risk by requiring the borrowers to have higher credit scores.
Most of us don’t spend time thinking about credit scores – unless you work here – and a lot of us are sure our credit score is pretty good. Why my guy Mike told me his credit score was 897 (the top FICO score is 850). But credit scores get affected by all sorts of things. Many of us pay our bills on time but once in awhile we send the check on the date due so it arrives late – ding on the score. Messy divorces – ding, ding. Or we close a credit card account – ding. Or we open a credit card account to get 10 percent off – ding. Or we have a lot of credit cards or we just have credit cards and not different types of debt such as installment loans and a mortgage – ding and ding. The exact formulation by FICO is secret. Remember Fair Issac is not ‘fair’. It is the last names of a couple of guys who came up with the calculation.
Well some lenders have set a minimum credit score requirement on FHA insured loans – those are the loans designed back in 1934 during the Depression to encourage lenders to make loans. FHA requires a minimum credit score of 580 to qualify for an FHA loan with a 3.5 percent down payment. The big lenders raised the minimum credit score on those FHA-insured loans to 640 – just a 60 point jump from what FHA requires. According to FICO, about 6.3 million people fall within that range. “Raising the minimum required credit scores to 640 may exclude as much as 15 percent of otherwise eligible FHA loan applicants. Minorities and borrowers in communities hardest hit by the recession are most likely to lose based on FICO scores”, says David H. Stevens FHA Commissioner.
So just when we have reduced home prices in Portland and record low interest rates, credit gets tightened. I understand risk assessment because the Portland Housing Center is a lender. We are proud of our 400 loans with a delinquency rate of 1 percent. It also makes me confident to say that the big lenders should use FHA’s credit guidelines and not add an additional hurdle to buying homes. Isn’t that how it all began – raising ‘something’ so that ‘some’ people couldn’t buy homes? I could have sworn that happened 20 years ago.
