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%, still can't get access to federally backed loans once considered mainstream. Lenders are instead routing them into higher-cost Federal Housing Administration 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.
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 one in six 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 Assn. President David H. 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.
Until then, Fannie and Freddie, though chartered by the government, operated as publicly held companies. They were bailed out by Uncle Sam, and they remain wards of the government despite having returned to profitability and having paid more dividends to the Treasury than they received in bailout funds.
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%.
But Melvin L. Watt, director of the Federal Housing Finance Agency, 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."
Lenders are ramping up efforts to make low-down-payment loans, Fannie Mae spokesman Andrew Wilson said. Fannie reported that it acquired 2,100 mortgages from 370 lenders in the first quarter of 2015 with down payments of 3% to 5%, out of a total of about 300,000 loan acquisitions.
"We're actively trying to reduce the cost of underwriting affordable mortgages and making them more available to more aspiring homeowners," said Freddie Mac spokesman Brad German, noting that Freddie has cut certain fees.
“We’re actively trying to reduce the cost of underwriting affordable mortgages and making them more available to more aspiring homeowners,” said Freddie Mac spokesman Brad German, noting that Freddie has cut certain fees.
Not everyone is persuaded by the calls to loosen Fannie and Freddie’s standards. American Enterprise Institute fellow Edward J. Pinto, a former Fannie Mae chief credit officer, said the FHA is already taking on too much risk by insuring low-down-payment loans for borrowers with poor credit and limited income.
“It’s not a good idea to have government agencies competing to see how low they can go,” Pinto said.
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% down payment, according to Ellie Mae, a company that processes mortgage applications for lenders.
The average applicant denied a Fannie and Freddie home-purchase loan had a third-tier score of 705 and an 18% down payment. (Borrowers can be denied for various reasons, including debt payments that would chew up too much of their income.)
The average score for an FHA loan that closed in May was 688, with a 5% down payment. FHA insurance is supposed to be available for borrowers with scores of 580, or even lower in some cases, but most lenders have imposed heavy surcharges on less-creditworthy applicants, and many cut off FHA loans at scores of 640 or even 680.
First-time buyers Blake Dobson, an insurance broker, and Samantha Dobson, a content editor for a social media company, bought a Laguna Niguel condominium in May 2014 for $258,000 with an FHA loan. They couldn't qualify for a Fannie or Freddie mortgage because his credit score was too low, they had a small down payment and they didn't have long histories at their employers.
Their loan required the FHA minimum of 3.5% down, but they also had to fork over thousands of dollars in upfront insurance fees. On top of that, they are paying $277 a month for the FHA insurance. Those premiums can't be dropped even if rising home prices boost their home equity, now about 10%, to more than the traditional 20% threshold for avoiding mortgage insurance on new loans.
"That's groceries and gas for a month," Blake Dobson said of the insurance payments.
FHA loans, which accounted for 9% of residential mortgages in 2000, fell to less than 2% of the market as subprime lending peaked in 2005 and 2006. As home prices crashed and battered banks tightened lending standards, FHA loans soared to more than 20% of mortgages in 2009, and they still made up about 12% of the market in 2013 and 2014.
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 ruled last week 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, a pattern that prevails in California as well as nationwide.
Blacks and Latino borrowers are also far likelier to wind up in so-called 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% of all conventional loans — mortgages backed by Fannie and Freddie — and 5.4% of the government loans, said fair-lending consultant Maurice Jourdain-Earl at Compliance Technologies Inc. in Washington, D.C.
Latinos had 14.8% of the conventional mortgages and 30.6% 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.