Written By: Joel Palmer, Op-Ed Writer
Last month, the Federal Housing Administration (FHA) announced changes to underwriting requirements to mitigate high-risk mortgage applications.
The agency has updated its Technology Open to Approved Lenders (TOTAL) mortgage scorecard “to manage the decrease in average borrower credit scores and the excessive risk layering that results when multiple risk factors are present.”
FHA has re instituted manual underwriting requirements on certain high-risk applications. The agency has removed those requirements in 2016. Mortgage underwriters and processors may receive feedback results for certain mortgages indicating that they must be manually underwritten. If so, the lender’s final underwriting review decision for those mortgages must be documented in accordance with existing FHA requirements for manually underwritten mortgages.
“Federal Housing Commissioner Montgomery has publicly stated numerous times in recent months that FHA must seek the right balance between managing risk and fulfilling its mission of supporting sustainable homeownership,” the FHA wrote in its announcement.
“To be successful long term, FHA must maintain the integrity of its insurance endorsements. This includes assessing the causes of the increase in higher-risk credit characteristics in the portfolio and making prudent and necessary changes to re calibrate and adjust its policies as warranted to manage credit risk.”
FHA has experienced an increase in high-risk credit characteristics in the mortgages it insureds. Those characteristics include:
A higher percentage of cash-out refinances, with the agency’s portfolio experiencing a 60 percent increase as a percentage of all refinances.
An increase in the concentration of mortgages with high debt-to-income ratios. Almost 25 percent of FHA-insured in fiscal 2018 had DTIs of more than 50 percent, the highest percentage since 2000. In January, more than 28 percent of endorsements had a ratio of more than 50 percent.
An average borrower credit score in fiscal 2018 of 640, the lowest average since 2008. More than 28 percent of new forward mortgage endorsements in the first quarter of fiscal 2019 had credit scores less than 640. More than 13 percent of new endorsements in the first quarter had credit scores less than 620, nearly a 19 percent increase over the fiscal 2018 concentration.
An increasing concentration of credit scores less than 640 combined with DTI ratios greater than 50 percent.
The Urban Institute’s Housing Credit Availability Index also shows that credit has become more available to mortgage borrowers. The index measures the percentage of home purchase loans that are likely to default, which provides an indication of mortgage loan accessibility; the lower the index, the tighter the lending standards and the more difficult it is to obtain financing.
According to its January report, mortgage credit availability in the government channel, which includes FHA loans, is near its highest level in 10 years. Likewise, mortgage credit availability in the GSE channel—Fannie Mae and Freddie Mac— has been increasing steadily since the financial crisis. In the third quarter of 2018, the index reached 3 percent for the first time since 2008.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.