Bad Credit Mortgage Loan – An analysis from 1999-2009

January 26, 2010

Author: William M. Davis

With more than a million of homes headed for foreclosure, bad credit loan lenders are now on a tightrope. The easy-money loaning standards that once helped people with bad credit mortgage loans are taking new measures and now applying new credit standards, making it just a little bit harder to get bad credit mortgage loans.

The Inside Scoop on Prior Lending Practices

The Inside Mortgage Finance, a trade publication reported that, when the housing market was booming, subprime lenders drew away many of the borrowers who traditionally used FHA-backed loans by offering even more favorable terms. Unlike the FHA, subprime lenders didn’t require borrowers to document their incomes. The FHA saw its share of the mortgage market fall to 2% in 2006.

But when the subprime market collapsed, mortgage brokers began steering borrowers into FHA-backed loans. Politicians and policy makers encouraged the FHA to refinance at-risk borrowers into fixed-rate loans. Suddenly, the FHA had an enormous chunk of the market. Average credit scores of FHA borrowers dropped sharply at first. In last year’s third quarter, the FHA insured 25% of mortgages, according to Inside Mortgage Finance.

The reports also claimed that the bad-loan problem stems, in part, from controversial programs that allowed home builders and other sellers to fund down payments for home buyers through nonprofit groups. And by late 2007, institutional investors were identifying at-risk mortgages in their portfolios and refinancing the borrowers into FHA-backed loans, thereby offloading their risk onto the agency. “It was an unintentional bailout of financial institutions,” says David Lykken, a partner at Mortgage Banking Solutions, an Austin, Texas, consulting firm.

Change in Bad Credit Mortgage Loans Today

Unfortunately the market has changed since 1999. Lenders have tightened credit requirements for obtaining bad credit mortgage loans. Today mortgage loan lenders now require higher down payment and a better credit score. Finding bad credit mortgage loan however is not impossible to obtain. There are now more bad credit mortgage loan lenders than ever before, but these bad credit mortgage loans come with higher interest rates and terms.

Change in Lending Standards

According to reports, The Office of the Controller of the Currency (OCC) recently adopted Guidelines for Residential Mortgage Lending Standards, comprising appendix C to part 30 of our regulations. These standards, which we refer to as “part 30,” became effective in April 2005. They further the goal of ensuring that national banks and their operating subsidiaries are not involved, directly or indirectly, in predatory or abusive residential mortgage lending practices. The guidelines reinforce the substance of earlier guidance in the OCC’s 2004 revisions to the real estate lending regulations and advisory letters 2003-2 and 2003-3.

The amendments to our regulations preclude lending based predominantly on the realization of the foreclosure or liquidation value of the borrower’s collateral without regard to the borrower’s ability to repay the loan according to its terms. They also prohibit banks from engaging in unfair and deceptive practices as defined in section 5 of the Federal Trade Commission Act. The advisory letters provide guidance concerning avoidance of abusive lending practices relating to the origination and purchase of mortgage loans and the use of third party lenders.