New FHA Standards

WSJ: New FHA standards could flag 50,000 loans yearly

Wall Street Journal

March 26, 2019

Updated standards from the Federal Housing Administration (FHA) regarding high-risk mortgages could affect up to 50,000 loans annually, according to the Wall Street Journal.

The publication cited FHA chief risk officer Keith Becker, who said that some 40,000 to 50,000 loans per year — about 4 to 5 percent of the mortgages that FHA insures annually — would be affected. Those loans would be flagged by the FHA’s TOTAL Mortgage Scorecard for manual-underwriting requirements if a borrower has a low credit score and high debt-to-income (DTI) ratio, putting those borrowers’ qualifications under further scrutiny.

“We have continued to endorse loans with more and more credit risk,” Becker told the Wall Street Journal. “We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.”

The FHA has yet to specify what combination of risk factors would lead to the system flagging an application. Becker, however, went on to say that many flagged loans “likely won’t pass muster” under FHA rules, seemingly confirming lender and originator fears that some borrowers could be entirely shut out of FHA financing under the new guidelines.

The change was brought about because of increasing application volume involving borrowers with high DTIs and lower credit scores. Fiscal-year 2018, for example, saw the highest percentage of applications with DTIs above 50 percent since 2000, as well as the lowest average borrower credit score since 2008.

The FHA had manual-underwriting requirements for borrowers with credit scores below 620 and DTIs above 43 percent, but those requirements were eliminated in 2016.

 

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