Jan. 30 (Bloomberg) -- Wells Fargo & Co., the second-largest U.S. home lender, and Taylor, Bean & Whitaker Mortgage Corp., the biggest privately held mortgage company, are raising credit score requirements and other standards for government-insured loans.

Wells Fargo boosted the minimum credit score for Federal Housing Administration and Department of Veteran Affairs loans it makes through brokers to 620, according to a Jan. 27 notice from the San Francisco-based bank. Ocala, Florida-based Taylor Bean “recently” increased its requirement to 600 from 580, Chairman Lee Farkas wrote in an e-mail.

With government-supported programs now accounting for almost all new U.S. mortgages, lender standards that are tighter than the FHA’s own requirements may erode a steady source of home financing and deepen property-price declines. The changes may help lenders lessen risk and reduce foreclosures by weeding out more consumers who have missed debt payments in the past.

“When you look at what causes someone to have a FICO score that low, you see things that make you question their ability or willingness to repay their debt,” said David Stevens, president of Long & Foster Real Estate Inc., a Chantilly, Virginia-based realty brokerage that also makes mortgages.

The FHA, which doesn’t care about credit scores in most cases, guarantees mortgages with down payments as low as 3.5 percent. The agency’s loans represented 31 percent of new mortgages last quarter, the highest on record, as the share of all government-supported programs reached a high of 87 percent, according to newsletter Inside Mortgage Finance.

Minimum Standards

“We set ‘minimum’ underwriting standards for FHA-insured mortgage loans,” Lemar Wooley, an agency spokesman, wrote in an e-mailed statement. “However, lenders may add additional standards -- as long as they are not unlawful or discriminatory.”

Wells Fargo, which has also toughened requirements for government-insured loans that it buys from other lenders, is “continuously reviewing our real estate lending product mix and underwriting practices to ensure they prudently align with marketplace risk,” spokesman Kevin Waetke wrote in an e-mail.

The bank is also requiring that brokers provide evidence that borrowers seeking “streamline” FHA refinancings haven’t missed any mortgage payments in the past 12 months, according to its notice.

Consumer credit scores, called FICOs after creator Fair Isaac Corp., range from 300 to 850. The median is 723, according to Minneapolis-based Fair Isaac’s Web site. The FHA’s only score- related requirement is that borrowers with scores below 500 must put at least 10 percent down, Wooley said.

Housing Slump

The existence of the government-supported mortgages, particularly FHA debt, has meant that most U.S. consumers can still get home loans amid the worst slump in housing prices since the Great Depression, according to Mark Fleming, chief economist at Santa Ana, California-based First American Corp.’s real-estate data and analytics unit.

“They are still able to buy a home, just not as big a one as they would have been able to afford” when lenders offered private loans with easier qualification hurdles and low initial payments, Fleming said in an interview last week.

Home prices on average have fallen by 25 percent since mid- 2006, according to the S&P/Case-Shiller 20-city price index. Sales of new homes in the U.S. fell in December to the lowest level on record, an annual pace of 331,000, Commerce Department figures released yesterday showed.

Foreclosures

While FHA loans are insured by the U.S. government and typically sold off within mortgage securities, lenders who retain contracts to service outstanding debt can be hurt by foreclosures because some of their costs in handling defaults aren’t reimbursed by the agency. The FHA also ranks lenders by default rates, and can use those scores to block offices within certain regions from granting its loans.

Lenders may also need to pay the FHA when loans default if fraud is uncovered or the paperwork is flawed. Originators selling loans to other lenders may need to buy back loans for those reasons or if borrowers miss their first payments.

“A lot of the intermediary firms that sell to the big aggregators made the underwriting changes before they did,” Long & Foster’s Stevens said in a telephone interview today. “We have the early-payment-default risk if borrowers are late any time in the first year.”

Bankruptcy Laws

FHA servicers also may face losses from new bankruptcy laws being debated by Congress. Changes in the law to allow judges to reduce homeowners’ mortgages, called cramdowns, would likely leave servicers bearing the losses, not the FHA, according to Laurie Goodman, a senior managing director at Austin, Texas-based Amherst Securities Group LP.

“It is very likely” FHA lenders “are adjusting their credit guidelines to protect against this possibility -- exactly the opposite” of lawmakers’ goal of aiding housing, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management, which oversees about $7 billion of fixed-income investments.

Senator Richard Shelby, an Alabama Republican, said during a congressional hearing this month that the FHA “poses a significant risk to taxpayers.” Reserves at the agency’s insurance fund have fallen to 3 percent from 6.5 percent a year ago, Housing and Urban Development Secretary Shaun Donovan said in a Jan. 13 congressional hearing.

In 2005, when the private subprime-mortgage market peaked, the FHA’s share was 4 percent, Donovan said. Other U.S.-supported programs include Fannie Mae and Freddie Mac, the government- chartered mortgage-finance companies put under federal control in September. VA loans go to military veterans.

The FHA generally wants borrowers’ housing payments to be less than 31 percent of their pretax income, a tougher hurdle than subprime loans once offered, Wooley said. The agency’s computer models, which look at combinations of risks such as down payments and credit histories, can offer lenders clearance to approve of borrowers with higher debt-to-income ratios. Lenders also can approve of higher debt burdens on their own if “there are other mitigating factors,” he said.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: January 30, 2009 15:47 EST