How far can lenders push the credit box?

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Lending

FHA push for more subprime lending will only make a bad risk worse

AEI: FHA not compensating for riskiness of high DTI loans as risk grows

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AEI’s National Mortgage Risk Index for home purchase loans stood at 11.41% in July, down almost 0.25% from June.

AEI’s International Center on Housing Risk co-directors Edward Pinto and Stephen Oliner say there continues to be little discernible volume impact from the QM regulations on the share of loans with debt-to-income ratios greater than 43%, but they point to a number of worrying trends. 

More troubling is the push for more subprime lending, Pinto says.

They cite a March 2013 quote from retiring Federal Housing Administration commissioner Carol Galante, who said, “[L]ender overlays are damaging the recovery by limiting access to creditworthy borrowers.”

Galante told HousingWire much the same thing on Thursday when she attended the Bipartisan Policy Commission’s retreat in Sun Valleny, Idaho.

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“Calls to more fully utilize existing the FHA and GSE credit boxes risk fueling home price volatility, particularly in lower income and minority areas,” Pinto says.

Pinto says that the FHA continues not to compensate for the riskiness of these high-DTI loans by tightening other underwriting criteria, while Fannie Mae and Freddie Mac are doing so only to a limited extent.

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“Subprime lending by FHA issuers continues to grow in response to government calls for expanded use of the FHA credit box,” AEI says. “This risks fueling home price volatility, particularly in lower income and minority areas.”

The FHA’s NMRI, at 23.8%, was unchanged from June, but it’s up 2.12 percentage points from July 2013, a level that risks fueling home price volatility, particularly in lower income and minority areas.

They argue that the softness in mortgage lending is not due to tight standards but to reduced affordability, loan put back risk, and sluggish economic recovery.

To read the full report, click here.

 

 

 

 

 

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