New lending rules announced by the Federal Housing Administration this week could put as many as 50,000 mortgages a year in jeopardy, reports say.
The FHA is the government body that insures mortgages for first-time buyers and also “high risk” borrowers with low credit scores and higher payments relative to their incomes.
This week however, the FHA announced tighter lending standards after saying it believes too many risky loans are being approved.
As a result, the FHA says it will flag more loan applications as “high risk”. Loans will also be subjected to a more rigorous underwriting process, so as to ensure it doesn’t issue loans to borrowers that can’t repay. The new rules will also protect the FHA against a rising number of defaults, it said.
Keith Becker, the FHA’s chief risk officer, told The Wall Street Journal that between 40,000 and 50,000 loans each year will likely be impacted by the tougher underwriting standards. That amounts to around 4 percent to 5 percent of all FHA insured loans issued each year.
“We have continued to endorse loans with more and more credit risk,” Becker said. “We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.”
The FHA had in 2016 eased its underwriting standards, for example by removing a rule that required manual underwriting for all applicants whose’ credit scores came in at under 620, and for those with debt-to-income ratios over 43 percent.
“Since that happened, we have observed a steady increase in the endorsement of higher-risk loans,” Becker said.
The FHA had warned Congress in a report last November that the growing number of defaults on high risk loans could impact its resources.
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