The Mortgage Lending Paradox

Does a record-low default rate mean lending standards are too tough?

Working to achieve mortgage approval

Following the real estate market collapse in 2008, a variety of steps were taken to ensure lending standards were more closely regulated. The goal was to ensure that we never went back to the days of NINJA loans – where mortgage financing was approved in spite of the fact the borrower had No Income and No Job or Assets.

Today, data shows those efforts were a rousing success. The default rates of 12% to 13% seen in the bubble years of 2006 and 2007 have plummeted to less than 1% since 2011. However, one real estate think tank called the Urban Institute believes this record-low default rate means we’ve done too good of a job of regulating. In other words, lending standards have become too strict, which is keeping potentially stable homebuyers out of getting into the market.

“Only the best borrowers are getting loans today and these loans are so thoroughly scrubbed and cleaned before they’re made that hardly any of them end up going into default,” writes Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center. “A near-zero-default environment is clear evidence that we need to open up the credit box and lend to borrowers with less-than-perfect-credit.”

The Institute also points to credit data from Fannie Mae and Freddie Mac. The data shows that 69% of borrowers who received mortgage approval on Fannie Mae or Freddie Mac back loans had FICO credit scores of 750 or better. They compared this to loans approved from 1999 to 2003 – what they consider are “normal” lending period. During that normal lending time, only 1/3 of borrowers had credit scores that high and default rates were still less than 2%.

“We certainly don’t want a lending environment where one out of every ten homebuyers ends up defaulting within 10 years of taking out a loan,” agrees Maria Gaitan, Housing Director of Consolidated Credit. “However, there are plenty of potential homebuyers with FICO scores of less than 750 who – with the right financial plan – can afford to make the jump into homeownership. Even borrowers with scores in the 600’s can succeed as long as they proceed into the homebuying process carefully.”

Working to overcome a high credit hurdle

Gaitan says she can understand why lenders are so wary, not wanting to get labeled in the public eye as a predatory lender. On the other hand, that kind of environment may be keeping well qualified homebuyers out of the market.

“Unfortunately until lending standards begin to be relaxed across the industry, potential homebuyers need to look for avenues that allow them to get approved even with less than perfect credit,” Gaitan explains. “Working with a HUD-certified housing counseling team is one way to find the right path forward to ownership, particularly when faced with challenges like a low credit score.”

Housing counseling services provide HUD-approved workshops that show new buyers how to overcome hurdles that might bar them from achieving the American Dream. Counselors also work one-on-one with homebuyers to help them address the specific challenges that they face.

“A HUD-certified housing counselor is an expert at navigating the real estate and mortgage markets in your area,” Gaitan continues. “They can help you identity federal, state and municipal programs that allow you to move forward towards mortgage approval even if you don’t have the perfect credit profile. They also make sure you get financing in a way that works for your budget so you don’t get into trouble with your loan down the road.”

If you’re thinking of buying a home, but you’re facing challenges with low credit or limited income, call Consolidated Credit’s Housing Counseling Team at to speak with a counselor for free today.