The Mortgage Bankers Association
sent a letter to the Federal Housing Administration
, asking for assurances that any FHA underwriting policy balances "clear, specific guidance with the ability of the lender to exercise the judgment necessary" in manual underwriting decisions for risky borrowers.
The letter provides comment on a proposed HUD guidance for “FHA Risk Management Initiatives: Reduction of Seller Concessions and New Loan-to-Value and Credit Score Requirements.”
In the letter, the MBA, a trade association that represents the real estate finance industry, cites concerns about how lenders will serve borrowers with housing ratios above the manual underwriting accepted thresholds and debt-to-income ratios below the current accepted ratio of 36%.
Under current FHA policy, risky borrowers must be manually underwritten when they have issues such as limited or nontraditional credit histories or credit scores that don’t effectively predict future creditworthiness. Manual underwriting guidelines are generally more rigid to address the increased risk.
The MBA said creating a balance between underwriting policy and lender judgment is "particularly difficult" at a time when minimizing the risk of indemnification requests is a top priority for lenders.
"A greater emphasis on specificity in policies is necessary to give underwriters comfort that their manual underwriting decisions can withstand a post-technical review," MBA said, quoting the letter in a newsletter released to members on Tuesday. "Without this guidance and given the current market conditions, lenders are reluctant to grant judgmental authority to underwriters and limits approval to certain borrowers."
The MBA wants the FHA policy to include "payment shock," an evaluation of whether a borrower can maintain a similar housing payment over time. "Specifically, lenders should evaluate the borrower's current cost of housing and compare it to the payments of the new mortgage," the letter said. "If a borrower has been successfully paying a high, comparable rental or mortgage cost, then FHA should have a favorable expectation that the borrower can continue to carry that cost."
The MBA also wants FHA policy to include requirements that lenders analyze how borrowers have historically managed debt, with an evaluation of a 12-month period that takes into account whether the borrower paid off debt solely to qualify for the debt-to-income ratio.
"A high housing ratio, however, can be a signal that additional reviews may be necessary to ensure that the borrower can successfully manage the loan. Underwriting is often considered an 'art and not a science,' and each borrower's situation requires an individual evaluation and solution that is difficult to standardize. With clear and transparent direction from FHA, lenders can provide borrowers with difficult underwriting situations fair opportunities to accessing credit," the letter said.
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