Those with fair-to-good credit — scores of 620 to 700 — usually can’t qualify for low-cost mortgages backed by government-sponsored financing giants Fannie Mae and Freddie Mac, which buy or guarantee more than half of the nation’s mortgages.
Even as the housing and mortgage markets are stabilizing, many borrowers with good credit remain shut out of the home-loan market or saddled with a new array of fees and extra costs.
Lending standards may have loosened since the end of the Great Recession six years ago, but mostly for buyers with excellent credit scores of more than 700, analysts say.
Borrowers with minor credit dings, or down payments of less than 20 percent, still can’t get access to federally backed loans once considered mainstream. Lenders are instead routing them into higher-cost Federal Housing Administration (FHA) mortgages, designed for low-income or bad-credit borrowers.
The cost of such FHA loans has also jumped, with hiked upfront fees for private mortgage insurance and monthly insurance payments that now are locked in for the entire loan period — regardless of the borrower’s payment record or escalating home equity.
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Such onerous insurance amounts to “poor person’s tax,” said John Taylor, chief executive of the National Community Reinvestment Coalition, a financial-advocacy group for lower-income and minority neighborhoods.
Increasingly, working and middle-class borrowers are also paying that tax, which can amount to tens of thousands of dollars in extra costs.
Those with fair-to-good credit — scores of 620 to 700 — usually can’t qualify for low-cost mortgages backed by government-sponsored financing giants Fannie Mae and Freddie Mac, which buy or guarantee more than half of the nation’s mortgages. In the first three months of this year, only about 1 in 6 of the loans written to Fannie Mae standards went to such middle-tier borrowers, according to Fannie Mae data.
The trends amount to a two-tiered mortgage market that heavily favors the affluent over the masses of workaday borrowers, experts and advocates said.
“Older, wealthier, white borrowers will be able to get loans all day long,” Mortgage Bankers Association President David Stevens, a former FHA commissioner, told an industry conference this spring in Raleigh, N.C.
For lower-income borrowers, lenders are “pulling up the gangplank,” Taylor said.
The rigid underwriting and high fees come as a reaction — or an overreaction, many experts argue — to the mortgage-credit debacle that triggered a global financial crisis.
Officials at Fannie, Freddie and the Federal Housing Finance Agency, which regulates them, say they have tried to encourage lending to lower-income and minority borrowers by reducing certain fees; clarifying when lenders must repurchase soured mortgages; and, this year, beginning to accept down payments as low as 3 percent.
But Melvin Watt, director of the Federal Housing Finance Agency (FHFA), said it can’t stop lenders from imposing higher credit standards than required.
“No one wants to return to the excesses and abuses of the past, and FHFA is taking steps to ensure that this does not occur,” Watt told a Realtors conference in November. “But the message we have tried to send is that we need to find a way back to responsible lending to creditworthy borrowers across all market segments.”
Borrowers with credit scores as low as 620 are in theory eligible for loans backed by Fannie and Freddie. But to compensate for extra risks, the companies impose hefty extra charges on loans to borrowers with lower credit scores and down payments, which translate into higher interest rates.
What’s more, many lenders — burned by legal expenses related to housing-boom-era mortgages — impose penalties, known as overlays, on less-than-stellar borrowers.
Freddie and Fannie sort loans into eight credit tiers, the top level being 740 and up. In May the average credit score for home-purchase loans at the companies was 757 with a 19 percent down payment, according to Ellie Mae, a company that processes mortgage applications for lenders.
With Fannie and Freddie loans hard to come by, some analysts worry that loan officers and Realtors may be steering customers into FHA loans simply because it’s easier to do so. If the borrowers are minorities, lenders may risk violating the 1968 Fair Housing Act, which forbids racial and other discrimination in housing.
The U.S. Supreme Court recently ruled that the law applies even if there is no evidence of overt bias. The court ruled that statistics showing a banking practice has a “disparate impact” on minorities are enough to prove a violation.
Data collected under the federal Home Mortgage Disclosure Act shows African Americans and Latinos are only half as likely as white people and Asians to get a loan at all. Blacks and Latino borrowers are also far likelier to wind up in government mortgages, which are loans backed by FHA or the Department of Veterans Affairs and bundled into Ginnie Mae mortgage securities.
In California in 2013, black people received 2.1 percent of all conventional loans — mortgages backed by Fannie and Freddie — and 5.4 percent of the government loans, said fair-lending consultant Maurice Jourdain-Earl at Compliance Technologies in Washington, D.C.
Latinos had 14.8 percent of the conventional mortgages and 30.6 percent of the government loans, Jourdain-Earl’s analysis showed.
Differences in relative wealth among racial groups don’t explain all the disparities, said Jourdain-Earl, whose software analyzes lenders’ files to determine if they are at risk of being accused of discriminating against minorities or other protected groups. African-American and Latino borrowers often receive less favorable loans than white borrowers with similar credit profiles.
Jourdain-Earl said he cautions potential clients to be prepared to investigate their employees, policies and practices — because the government could use them as evidence in a discrimination case.
“I tell them, ‘Don’t hire me if you’re not ready to do something about what I find,’ ” he said.