November 30th, 2010
We’ve addressed the issue of mortgage lenders adding their own requirements for approving FHA mortgage loans, a practice known as “investor overlay.” This typically means that a mortgage lender adds its own requirements over and above HUD/FHA requirements.
For example, a mortgage lender may require a higher FICO credit score than the FHA minimum of 580 for a mortgage loan with a minimum down payment of 3.5 percent. We don’t think this is conducive to improving the housing markets or promoting home ownership, and evidently others agree.
The National Community Reinvestment Coalition (NCRC) has sent letters to mortgage lenders it believes have used investor overlays to “up the ante” on qualifying for FHA loans. We’ve previously challenged investor overlays as further reducing available sources of affordable home loans for those who can’t qualify for mortgage loans underwriting to conventional lending criteria.
In this economy, a 20 percent down payment isn’t easy to produce for many folks. Instituting requirements in excess of FHA guidelines is bad enough, but The NCRC is now raising the ugly spectre of housing discrimination in its assertion that investor overlays are being used by mortgage lenders serving communities predominantly populated by minorities. In the past, before fair lending laws were enacted, mortgage lenders could “red-line” certain neighborhoods by charging exorbitant fees for home loans in red lined communities, or worse, flat-out decline to lend in red-lined neighborhoods. It was no coincidence that these practices typically equated to discrimination against minority borrowers and neighborhoods.
Prohibiting investor overlays would reduce discrimination claims
FHA, as an agency of the federal government, takes a strong position in defense of fair lending practices as required by the federal Fair Housing Act. In these times of economic challenges and difficulty, it would seem that FHA would want to do everything in its power to promote accessible home loans for working class people who would love to come home to their own home rather than paying their landlords’ mortgages.
The more accessible home loans are made available, the more people will buy homes. This produces demand for mortgage loans, and reinvigorate depressed housing markets. What’s not to understand?
Let’s give Americans their best shot at owning their own homes and end arbitrary and potentially exclusive investor overlays on FHA loans. And by the way, ending investor overlays now can help with limiting potential problems arising from potential claims of discriminatory lending. If FHA makes the rules for its home loan programs, then FHA lenders should follow FHA guidelines for making home loans. Allowing otherwise doesn’t make sense and is asking for trouble.