The Federal Housing Administration has announced tighter lending standards, which could put up to 50,000 mortgages in jeopardy annually. The FHA insures mortgages for first-time home buyers and often borrowers with low credit scores and high loan payments relative to their incomes. The clampdown is on lending rules that the FHA believes are allowing too many risky loans to be approved.
The FHA says it will begin to flag more loans as “high risk.” Loans will go through a rigorous manual underwriting process, the agency says. The FHA claims it wants to ensure that it isn’t issuing loans to borrowers who can’t repay and better protect itself against an uptick in defaults that could ultimately deplete its reserves.
About 40,000 to 50,000 loans a year will likely be affected by the tighter underwriting standards, or about 4 percent to 5 percent of the FHA-insured mortgages originated annually, Keith Becker, the FHA’s chief risk officer, told The Wall Street Journal.
“We have continued to endorse loans with more and more credit risk,” Becker told WSJ. “We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.”
In 2016, the FHA loosened up its underwriting standards, such as removing a prior rule that required manual underwriting for mortgages with credit scores below 620 and debt-to-income ratios above 43 percent.
“Since that happened, we have observed a steady increase in the endorsement of higher-risk loans,” Becker says. In a November report to Congress, the FHA revealed threats to its program that could drain its resources, including a sharp increase in borrowers with high debt-to-income ratios and a drop in average borrower credit scores.
In the previous fiscal year, the average credit score for borrowers of FHA-insured mortgages dropped to 670, the lowest in a decade. Nearly a quarter of FHA-insured mortgages were issued to borrowers with a debt-to-income ratio higher than 50 percent.