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These Obama appointees could cause another housing collapse By Paul Sperry October 14, 2017 | 11:43am

Obama-administration holdovers Mel Watt (left) and Richard Cordray are taking risks with loan policy.Bloomberg via Getty Images

A pair of top Obama-appointed bank regulators still serving in the Trump administration could spark another mortgage meltdown by lowering credit standards and encouraging risky lending practices.

Democrat Mel Watt, who is serving a special five-year term as head of the Federal Housing Finance Agency, is pushing the mortgage-lending giants he regulates — Fannie Mae and Freddie Mac — to offer home loans to deadbeat borrowers with shaky credit, setting up conditions for another housing-market crash, industry officials warn.

Meanwhile, the other Obama holdover — liberal Democrat Richard Cordray, who continues to head the Consumer Financial Protection Bureau through 2018 — has launched an unprecedented crackdown on credit reporting bureaus for allegedly widespread errors and bias, leading the industry to strip some negative information from credit reports used by home lenders, which analysts fear could blind them to default risks.

“We are dumbing down the requirements all over again,” warned former chief Fannie credit officer Ed Pinto. “It’s getting very dangerous.”

Credit scores of approved borrowers, for example, already have been trending down, even as their debt levels have grown, according to Ellie Mae, a leading mortgage data firm. And the Office of the Comptroller of the Currency recently warned: “This easing trend over the past three years is similar to the degree of easing in the years preceding the 2008 financial crisis.”

Watt, a former Congressional Black Caucus leader, has been demanding Fannie and Freddie ease credit standards — just as the feds did starting under President Bill Clinton, in pursuit of the same goal: “to help African-Americans achieve the goal of homeownership,” as Watt declared in a recent speech in New Orleans.

In his remarks, the former North Carolina lawmaker, who once demanded Freddie back home loans for welfare recipients in his district, urged underwriters to increase “flexibility” when qualifying low-income blacks to help overcome historic discrimination.

“The truth is that the egregious historical forms of housing discrimination, such as racially restrictive covenants and overt racist attitudes, have largely given way to other intractable obstacles that negatively impact African-American homeownership,” Watt said.

One of those “obstacles,” he argues, is down-payment requirements: “Perhaps the most difficult challenge many African-Americans face in obtaining a mortgage [is] the lack of down payment.”

So now, borrowers need only put 3 percent down to get a Fannie-backed loan — even if the down payment is a gift. Fannie also has started up a new subprime lending program. Such loans were blamed for plunging millions of minorities into foreclosure in the last housing crisis.

What’s more, Watt has instructed Fannie and Freddie, who went bankrupt last decade after guaranteeing too many risky loans, to back home loans for borrowers whose household debt consumes up to 50 percent of their income. “Flexibility to allow for higher DTIs (debt-to-income ratios) is extremely important to supporting homeownership for African-Americans,” he said.

‘We are dumbing down the requirements all over again…it’s getting very dangerous.’

 - Ed Pinto

The FHFA chief has also ordered Fannie and Freddie to back home loans for “borrowers who do not have credit scores,” he told brokers, a pool that includes undocumented immigrants and deadbeats. All they have to do is show they’ve paid utility bills or rent on time, he said.

Fannie and Freddie rely on FICO credit scoring to predict risk. But Watt thinks FICO credit is too strict and cuts off millions of low-income minorities and immigrants from mortgages. So he’s pressing Fannie and Freddie to adopt a more forgiving model. “We have the pedal to the metal” on adopting a new model, he said.

Analysts say the loosening of credit criteria will have a ripple effect throughout the housing market. The federally controlled mortgage giants set the underwriting standards for the entire mortgage industry.

Cordray, meantime, has sicced his powerful agency, CFPB, on Equifax, Experian and TransUnion, to help ease credit restrictions on minorities as well.

In a recent speech, Cordray said he hopes to bring more than 10 million minorities who don’t have credit scores, due to a lack of recent credit history or too much derogatory information in their credit files, into the market for home loans by having the credit reporting bureaus include “alternative data” in files to help them build a credit history and gain access to credit. Such files, he says, would draw from unconventional sources including monthly cellphone payments, even though such records are not loan accounts and do not predict the ability to repay debt.

“The bureau’s work related to alternative data has focused on ways that such data may help consumers who lack sufficient traditional credit history to obtain a credit score,” CFPB spokesman Sam Gilford explained.

Analysts fear the changes could inflate the credit scores of high-risk borrowers, making them look more creditworthy than they really are, and hurt bankers’ ability to make sound loans. In a recent industry report, LexisNexis Risk Solutions warned deleting negative public records data from credit reports could be “catastrophic” for the housing market, because homebuyers with judgments and tax liens are five times as likely to default on a mortgage as people without those records.

Watt has helped sell the changes by having Fannie send letters to nervous mortgage lenders it purchases loans from urging them to continue to have “full confidence” in the credit reports.

Watt’s office did not respond to requests for comment. Cordray, for his part, insists alternative credit scoring “may paint a more complete and perhaps a more accurate picture of creditworthiness.” Gilford further noted that the agency has stressed creditworthiness by issuing a rule “requiring lenders to assess borrowers’ ability to repay their mortgage,” though the rule sets no minimum credit score.

Industry officials worry that when the economy and housing prices turn south again, a lot of these politically influenced loans will go bust — just as they did last time.

“It’s the definition of insanity,” Pinto said.

http://nypost.com/2017/10/14/these-obama-appointees-could-cause-another-housing-collapse/



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