During the first week of August, the Federal Housing Administration (FHA) announced its plans to expand credit facilities for all underserved borrowers and ease the risk for all approved lenders. This new measure is intended to broaden the measurement metric for assessing a lender’s default performance.
This move is an attempt to expand mortgage loan facilities to customers facing a credit crunch. Riskier customers with an unimpressive credit rating and tight credit conditions can also apply for a loan under the new initiative.
For over a year, FHA has struggled to introduce loans for riskier customers, especially after the financial fallout of 2008. The new rules will measure a lender’s default rate using thee different credit score bands or slabs, and compare the credit score against the FHA target rate instead of the lender’s peers in the open market.
Ed Golding, principal deputy assistant secretary at the Department of Housing and Urban Development (HUD), remarks that the new regulations will help the lenders, the FHA and the public at large in knowing exactly who each and everyone is serving.
By means of understanding the FHA’s tolerance levels for acceptable risks, in light of a wide variety of credit scores, the overall lender confidence will improve and the FHA will have more data on the success ratios for the lenders.
This new rule complements the FHA’s compare ratio. Thus the compare ratio was used to identify and monitor all lenders with excessive defaults and claim rates, when pitted against their peers. High rates of defaults and claims can lead to the termination of a lender and the cancellation of their license by the FHA.
This change in mortgage loans is in response to several lender complains and concerns over the past few years. Most of the lenders were perturbed about the policy that required a comparison of the borrower’s credit to that of the peers in the market. They opined that such credit should only be compared with FHA’s risk tolerance.
The new rule satisfies all lender concerns in this regard. It will help FHA lenders to review and analyze the effects their lending will have throughout the entire credit spectrum, in the context of the agency’s willingness to provide insured loans to all eligible borrowers irrespective of their low credit scores and rankings.
Julian Castro, the Secretary at HUD, remarked that comparing a lender’s performance against their peers in the local market provides unreliable results. In essence, such comparisons do not provide a complete picture as to the efficiency of the portfolios, their performance in the open market, the ROIs involved, the pricing fluctuations and finally, who these investments are serving.
In the spring of 2014, the FHA had proposed the initial development of this new measure. Although facing initial criticism from some government officials who intended to add unnecessary red tape to the process, the FHA has been successful in implementing the new strategy. It is part of a broader strategy by this governmental organization to expand credit and mortgage facilities to underserved borrowers and individuals with a low credit score.
The change has been implemented across the United States since August.