FHA Standards
The FHA, with down-payment requirements as low as 3.5 percent, has also been raising the average credit score for its mortgages. The average credit score for FHA loans to purchase homes was 701 in April, up from 669 three years earlier, according to government data. The loans now account for about a third of new mortgages, five times the size of its 2007 share, according to the Department of Housing and Urban Development.
Stricter standards are necessary to reduce risk for the government and, ultimately, the taxpayers, said Frank Pallotta, managing partner of Loan Value Group, a mortgage-consulting firm in Rumson, New Jersey. The U.S. rescued Fannie Mae and Freddie Mac from insolvency after they had invested in subprime securities as a way to meet their Congressional mandate to support affordable housing.
"It's kept some people out of the game, but in this market, with falling prices, you don't want everyone in the game," Pallotta said. "It's our tax dollars on the line."
Bank Overlays
By the time borrowers get to their local banks, the standards may be even higher, said Mark Goldman, a loan broker with C2 Financial Corp. in San Diego. Lenders want to prevent mortgages from being returned by Freddie or Fannie, so they exceed the rules -- a safety cushion called an overlay.
"Lenders are scared, so they're going to have overlays," Goldman said. "What you get, as a result, is the most conservative underwriting in 20 years."
Stamper, in Sacramento, knows that. She missed some credit card payments after a car crash with an uninsured driver last year, and the financial history she described as "near perfect" took a hit. The so-called loan-level adjustment fees Fannie Mae and Freddie Mac charge, which can add as much as 3 percentage points to rates to compensate for riskier loans, put her dream of buying a home out of reach.
"Clearly the market was too easy during the housing boom," said David Berson, the former chief economist of Fannie Mae who now holds that position for PMI Group Inc. in Walnut Creek, California. "It is almost certainly too tight now."