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The FHA premium cut and agency low down payment loans were intended to increase homeownership among first-time and low to moderate income home buyers. It hasn’t worked so far.
The premium cut tends to have just redirected borrowers from traditional conventional loan programs into an FHA-insured loan. Also, those who recently closed using FHA insured loans refinanced those same loans into a new FHA-insured loans at the lower annual premium. Although FHA has increased its business, it has done so at the expense of Fannie and Freddie (the agencies).
Now another report from the American Enterprise Institute (AEI) International Center for Housing indicates that the business being purchased by the agencies is increasing in risk (Risk Details). This due to more of the higher credit score and lower DTI loans going FHA, with banks handling most of the standard QM type loans.
This leaves the Agencies with the fringe QM loans, with a lower than normal credit score, a DTI above 43% (limit for a standard QM), and a higher LTV. It seems to me that the agencies are being adversely selected.
To continue to compete, the agencies have loosened some credit and underwriting guidelines and eligibility requirements in hopes of increasing lending opportunities to more potential homebuyers. By doing so, they have again opened their doors to the purchase of additional risky business. This is also partly the result of certain mandates placed on them by Congress to do their part in increasing the Country’s homeownership rate. If I’m not mistaken, this is what helped get them into trouble in the past.
Although the actions taken by FHA and the agencies may be good for lenders, it also places a huge responsibility on them. Lenders can now originate more loans for a wider spectrum of potential buyers. That’s good.
However, they must do so ensuring, as best they can, that these loans will perform as expected. Lenders have a responsibility to originate quality loans, which meet all guidelines and product parameters, to borrowers who have the ability to repay the debt, and can continue to afford and maintain the home being financed.
FHA and the agencies are on shaky ground. Another round of high loan defaults and foreclosures can prove devastating. If so, it may not be so easy to recover next time around. That’s one risk we shouldn’t take.
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