Jun 11, 2019 14:45 ET
Scotsman Guide Media
FHA report shows growing number of riskier loans
A quarterly report from the Federal Housing Administration (FHA) revealed that the average credit score for an FHA mortgage borrower in the second quarter of this year was 665 — the lowest figure since 2008.
The average credit score for an FHA borrower is down 2 points on a quarterly basis. Although it remains above pre-housing crisis levels, it is still well below the peak score of 703 recorded in the second quarter of fiscal year 2011.
This downward shift is part of a long-term trend in the FHA’s credit-risk profile that has spanned nearly a decade. In 2011, nearly 60% of FHA borrowers carried credit scores higher than 680. Today, that share hovers around 34%. Meanwhile, borrowers with credit scores of less than 640 have grown to a nearly 30% share, while the share of FHA borrowers with scores higher than 720 fell to less than 13%.
The FHA also has seen an increase in the concentration of mortgages with high debt-to-income (DTI) ratios. Nearly 28% of FHA mortgages in second-quarter 2019, for example, involved borrowers with DTIs higher than 50% — the largest share since at least 2000. The average loan-to-value ratio fell to 92.05% in the second quarter, down from 92.13% in the first quarter.
The FHA report appears to confirm the reasoning behind changes to the agency’s underwriting regulations earlier this year, when the FHA announced new manual underwriting standards for loans it deemed to be “high risk.” The FHA has yet to publicly specify the concrete combination of risk factors that would flag a loan as “high risk,” but the Wall Street Journal reported that those new standards could flag an estimated 50,000 loans annually.
The report’s authors acknowledged this, noting that rising DTI levels present “a risk to the [Mortgage Market Insurance Fund] that the FHA is attempting to manage and mitigate through various policy levers.” The report also noted that the performance of riskier mortgages, such as those with lower borrower credit scores, “will be closely monitored to determine when policy changes should be implemented.”
The report showed that, even with the elevated risk profile for these loans, FHA lending actually declined nearly 12 percent in the second quarter. The FHA endorsed 201,779 forward mortgages in the second quarter, down 11.78 percent compared to first-quarter 2019. Notably, that’s the fewest FHA loans originated in a quarter in four years.
The dollar volume of all forward-mortgage endorsements in the second quarter was down 10.57 percent, although the dollar volume of refinance endorsements was up 2.38 percent from the previous quarter