Mortgage

Latest FHA shift to mitigate risks may shut out some homebuyers

Recent changes to TOTAL Mortgage Scorecard have some lenders worrying they won't close

Last week, the Federal Housing Administration took steps to mitigate risks to its single-family portfolio, announcing updates to its TOTAL Mortgage Scorecard that may flag some loans for manual underwriting.

The change applies to all loans with case numbers assigned on or after March 18th, meaning that it is likely to affect some of the loans currently sitting in an FHA lender’s pipeline.

Chatter among members of the lending community suggests a number of originators are unhappy about the changes, fearing that the end result may be that some of their borrowers will be shut out of FHA financing.

Some said the FHA did not go about implementing the changes the right way, creating confusion about how the risk is being mitigated, while others said they felt as if the rug had been pulled out from under them, and fear that borrowers who no longer qualify will be angry, according to email exchanges between lenders and mortgage brokers, shared with HousingWire.

For its part, the FHA said it is taking necessary steps to address some of the risk trends apparent in its single-family portfolio and flagged as concerning in its 2018 Report to Congress.

Specifically, FHA loans have seen a substantial increase in cash-out refinances, a drop in the average borrower credit score, and an increase in borrowers with high debt-to-income ratios.

In its letter about the Scorecard updates, the FHA said that the number of FHA refinances that are cash-outs increased 60% in 2018, and that almost a quarter of all FHA loans in 2018 had a DTI ratio above 50%.

The average credit scores for FHA borrowers has also declined, falling to 670 in 2018 – the lowest average since 2008.

Combined, these factors are signaling untenable risk for the agency as they flag the potential for the program to drain the Mutual Mortgage Insurance Fund.

“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 said in its letter.

“To be successful long term, FHA must maintain the integrity of its insurance endorsements,” it continued. “This includes assessing the causes of the increase in higher-risk credit characteristics in the portfolio and making prudent and necessary changes to recalibrate and adjust its policies as warranted to manage credit risk.”

The agency said the updates to its Scorecard are just the first step it will be taking to address these risk factors.

“FHA will carefully monitor the impact of this change and is preparing to implement additional changes to maintain a better balance of managing risk and fulfilling its mission,” the agency stated.

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