FHA Lending to Risky Borrowers Increasing

Written By: Joel Palmer, Op-Ed Writer

More Federal Housing Administration (FHA) loans are being made to riskier borrowers, according to FHA’s latest quarterly report to Congress.

During the quarter that ended March 31, 2019, FHA data shows:

•The average credit score for FHA loans fell to 665, the lowest level in about a decade.

•The share of borrowers with credit scores less than 640 rose to nearly 30 percent.

•The share of borrowers with credit scores above 720 declined to 12.95 percent. The share of these borrowers has declined each quarter for about three years.

•Nearly 28 percent of FHA-insured forward mortgage purchase transactions involved borrowers with debt-to-income (DTI) ratios above 50 percent.

•The average property loan-to-value ratio fell to 92.05 percent.

Since 2011, the share of borrowers with credit scores above 680 has fallen from 60 percent to 34 percent. Combined with the increase of borrowers with scores below 640, FHA is endorsing a “much riskier population of mortgages,” according to the report, adding: “Performance of these mortgages will be closely monitored to determine when policy changes should be implemented.”

DTIs over 50 percent are also a trait of an increasing number of FHA borrowers. In the last fiscal year, about a quarter of FHA purchase mortgage recipients had DTIs exceeding 50 percent. That percentage rose to 28 percent in the most recent quarter, the highest percentage since 2000.

“High DTI ratios may preclude borrowers from having the ability to make current mortgage obligations,” said the report. “This is a risk to the Mutual Mortgage Insurance Fund (MMIF) that the FHA is attempting to manage and mitigate through various policy levers.”

In March, FHA reinstituted manual underwriting requirements on certain high-risk applications. The agency had removed those requirements in 2016.

Additional information contained in the report includes:

•The number of single-family forward endorsements in the second quarter decreased 11.78 percent from the prior quarter. The amount of FHA mortgages totaled $42.5 billion, down 10.57 percent from the previous quarter.

•The number of reverse mortgage (HECM) endorsements increased 11.32 percent from the previous quarter. The endorsement volume for reverse mortgages increased nearly 13 percent to $2.8 billion.

•The share of purchase mortgages decreased from 78.52 percent to 76.03 percent. Cash-out refinance mortgages accounted for a slightly higher share in the second quarter, at 17.72 percent.

•Prepayment speeds this quarter were 44.21 percent lower than predicted due mostly to the re-calibration of FHA’s prepayment model.

•Claims were 17.39 percent below predicted level by count and 36.39 percent below predicted level by dollar amount.

•The year-to-date net loss rate on claim activity of 42.77 percent is slightly higher than the projection of 42.51 percent.

The MMI Fund account balance at the end of the quarter was $49.87 billion, up from $49.52 billion the previous quarter.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.