FHA Considering Tightening Ratios

From National Mortgage News:

The Federal Housing Administration is considering tightening borrowers’ debt-to-income ratios, a move that would prevent the most highly leveraged consumers from qualifying to buy a home. The agency has yet to determine what the new minimum and maximum ratios would be and when such changes would go into effect, but the very fact that FHA is contemplating such a move is worrisome to some lenders who say a tightening would exclude more borrowers from the still-fragile housing market and potentially cause home prices to fall further. From FHA’s perspective, putting a hard cap on debt-to-income ratios would potentially lower its delinquency rate and keep its Mutual Mortgage Insurance fund on sound financial footing.

 “It doesn’t do anybody any good if the borrower can’t meet their debt obligations,” Robert Ryan, FHA’s acting commissioner, said in an interview Thursday. “We absolutely have to make sure borrowers are in a position to sustain homeownership.” For two years now the agency has struggled to tighten guidelines and raise the bar for lenders. But FHA has tried to guard against being adversely selective by tightening its debt ratios. FHA loans are more or less the only product lenders can offer borrowers who have little money for a downpayment (outside of the government’s loan programs for veterans or rural residents). Though some of the largest banks already have their own DTI caps, some lenders have been willing to give up credit standards to increase loan volume. FHA is looking at the variables that go into its automated underwriting system Total Scorecard, which considers a variety of factors when automatically approving a loan. “We’re not sure the model is predicting the outcome,” Ryan said. “We might tighten the DTI ratios up and that would mean instead of an automated approval the lender would do a manual review of those loans to make sure they were comfortable the borrower had more income or savings and there were some extenuating circumstances that would warrant the approval of that loan even if there was a slightly higher DTI.” One possible scenario would be for FHA to adopt the debt ratios of its short-refinance program, which was designed to help underwater borrowers refinance into an FHA loan. To qualify, a borrower’s monthly housing payment, including a second, cannot be greater than 31% of his or her pre-tax income and the total DTI ratio cannot exceed 50%. Source: National Mortgage News

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