Lower FICOs, higher DTIs prompt a change in FHA loan underwriting

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The Federal Housing Administration is returning to manual reviews of higher-risk loans it insures because it's finding that a growing share have lower credit scores, higher debt-to-income ratios, or both.

Effective for case numbers assigned Monday, the FHA is making a change to its Technology Open to Approved Lenders Mortgage Scorecard system that reinstates manual underwriting requirements for certain mortgages with credit scores below 620 and DTIs above 43%.

"FHA will carefully monitor the impact of this change and is preparing to implement additional changes to maintain a better balance of managing risk and fulfilling its mission," the agency said in an email to single-family mortgage lenders and stakeholders.

This will mark the third time the FHA has changed this requirement in recent years. The agency originally introduced the manual underwriting requirement in 2013, but removed it in August 2016.

Certain FHA loan credit indicators are weaker than they have been in several years.

The percentage of traditional single-family FHA loans with DTIs above 50% recently rose to a high that hasn't been seen since fiscal year 2000. During the fiscal year that ended Sept. 30, 2018, almost 25% of the traditional single-family mortgages the FHA insured had DTIs above 50%. The percentage of high-DTI FHA loans has continued to rise in 2019. More than 28% of the FHA loans endorsed in January 2019 had DTIs above 50%.

Also, the average FHA credit score, at 670, is the lowest it has been since 2008. More than 28% of the traditional single-family loans the FHA endorsed during the first quarter of the current fiscal year have credit scores below 640, and more than 13% of all traditional single-family mortgages the FHA endorsed during the same time period had credit scores below 620.

Additionally, there is an increasing concentration of loans that have both credit scores below 640 and DTIs above 50%, according to the FHA.

Fannie Mae also has tweaked its underwriting guidelines due to concerns about layered risks and higher DTIs.

DTIs above 50% are considered extremely high. A DTI of 43% or lower is needed to meet the Qualified Mortgage definition that gives loans a safe harbor from ability-to-repay requirements.

Government and government-sponsored enterprise loans have exemptions from have having to meet QM requirements that have been subject to debate.

Given the decline in loan prospects during the past couple of years and the pressure on lenders to bring in mortgages, there has been concern that risk layering could increase.

Multiple exceptions to standard mortgage underwriting contributed to the 2007 housing crash.

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