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The credit box is being squeezed by the fear of high servicing costs associated with loans likely to default.
Over the past few years, it has become much more difficult for a borrower to obtain a mortgage loan. The median credit score has risen from 701 in 2001 to 753 in 2015-and that's just one telling indicator. ¶ The Urban Institute's new Housing Finance Policy Center Credit Availability Index (HCAI), which tracks the percent of mortgages expected to go 90 days delinquent, now stands at 5.0 percent as of the third quarter of 2015-down from 16.4 percent in 2006 and 12.5 percent in 2001-2003. ¶ The credit box established by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and the Federal Housing Administration (FHA) is quite wide. ¶ So why is it so much harder to get a loan?
Because lenders have been applying credit overlays within these credit boxes for many reasons, including, most significantly:
* Uncertainty over when and why the GSEs or FHA will put the credit risk of a loan back to a lender for a violation of their underwriting or servicing rules; (for more information on how this is tightening credit and what policymakers can-and can't-do to address the challenge, see Jim Parrott and Mark Zandi's September 2013 paper, Opening the Credit Box, at www.urban.org/ research/pubHcation/opening-credit-box);
* heightened litigation and related reputational risk; and
* the high and variable cost of servicing delinquent loans.
The first two factors have been much discussed, by us and others, but the third factor-the focus of this article-has been largely overlooked.
How do the costs of servicing delinquent loans contribute to credit overlays?
It is expensive to service delinquent loans. In 2013, the cost of servicing a non-performing loan was, on average, 12 times that of servicing a performing loan-$1,949 per year versus $158 per year (see Figure 1).
The costs of servicing performing loans include both overhead and direct costs (servicing technology, escrow, call center, Web page maintenance, investor reporting, etc.). The costs of servicing non-performing loans include base costs of servicing any loan, the costs associated with managing a default (collection, loss mitigation, foreclosure, bankruptcy, etc.), as well as unreimbursed foreclosure and real estate-owned (REO) losses.
And while the cost...