This article introduces the idea of “defensive lending” as a main reason that underwriting is so difficult. “”Defensive lending is the mortgage equivalent of defensive medicine,” where doctors run more tests than needed to reduce litigation risk. “Rather that more medical tests, mortgage lenders are adding underwriting requirements and program restrictions to avoid overstepping a sometimes ambiguous line” that will trigger penalties from Fannie, Freddie, or FHA.”
Two U.S. agencies try to get lenders to ease tough mortgage rules
The Federal Housing Finance Agency and the Federal Housing Administration say many lenders’ underwriting restrictions go beyond what the agencies themselves require.
WASHINGTON — Two federal agencies with far-reaching influence over the mortgage market are working on a problem that could affect the ability of many consumers to obtain a home loan: How to encourage private lenders to ease up on their underwriting restrictions that go beyond what the agencies themselves require for mortgage approvals.
Both the Federal Housing Finance Agency, which oversees giant investors Fannie Mae and Freddie Mac, and the Federal Housing Administration, which runs the low-down-payment FHA program, are considering steps they might take to persuade lenders to open the mortgage spigots a little wider.
Together, Fannie, Freddie and the FHA account for 90%-plus of all home loan funding. The focus of their little-publicized reform projects: the “overlay” rules many lenders have adopted that call for extra fees, larger down payments and higher credit scores than Fannie, Freddie or the FHA require.