The Federal Housing Administration is looking to serve a wider range of borrowers, and in order to do so, it's hoping to continue refining the process by which mortgages are underwritten.
A recent Mortgage News Daily piece detailed a number of housekeeping measures underway at the FHA, including an initiative to serve more borrowers with so-called near-miss credit profiles. Given the administration's commitment to sound underwriting for government-insured mortgages, expanding its borrowing pool poses some challenges. Lenders are often on the hook for defaulted home loans, and borrowers with lower credit scores are traditionally less likely to fulfill their mortgages. As a result, many home loan providers already strapped with post-recession compliance demands have steered clear of such offerings, but market perceptions are changing.
Offering wider access is a delicate balance
The FHA has stated an expectation that a full three-quarters of the loans it insures over the next year will be aimed at borrowers with FICO scores of 680 or lower. It's part of an ongoing effort to revitalize the housing market as a whole by responsibly lending to first-time homebuyers and other consumers whose profiles are mostly strong, if not quite in line with Qualified Mortgage standards. To stimulate sustainable residential sales activity, the FHA and associated lenders must begin widening the pool of eligible buyers - a process that may require a shift toward more case-by-case profile evaluations.
Expanding the borrowing pool must be done carefully, given both the defect and default rates on FHA loans. The administration has publicly stated that both are too high, as too many avoidable underwriting errors occur in cases involving both highly qualified and middling borrowers. When loans are not properly underwritten, the likelihood of delinquency or default is heightened, and the notion that more modest-profile buyers should be approved loses some of its momentum.
Adjusting terms
FHA officials have maintained mortgage insurance premium rates will not be adjusted in the near future, even though many industry analysts contend such a change would help enhance affordability. Currently, the share of FHA borrowers with credit scores between 640 and 680 - the realm of near-miss qualification - is about half the size it was in 2011, before the QM and Ability to Repay rules were introduced. It's a shift that some say represents a departure from the FHA's history and core tenets, which include providing mortgage credit access to underserved populations.
But there's a growing sense among lenders across retail, correspondent and wholesale channels that the terms for qualification need to be altered, either by way of offering new products or reevaluating internal assessment processes. A burgeoning market exists for alternative products, but that's primarily because traditional loan offerings generally haven't been available to less-qualified prospective buyers. As the economy continues to improve, more buyers will likely make themselves eligible - or at least come a lot closer. That's part of the argument for lenders to move toward the middle, where they can meet near-miss applicants and help stimulate more consistent sales activity.
As the weekly applications volume surveys from the Mortgage Bankers Association have revealed, demand and approval rates have been anything but consistent throughout 2014. Some of that has to do with tight housing inventory in certain local markets, as well as stagnant pay increases across many labor sectors, but an expansion of the borrowing pool could, theoretically, help mitigate those factors. That's the argument for those pushing the FHA to expand its borrowing pool: Greater chances at being approved will drum up more widespread interest, and ultimately put more first-time buyers into new homes.