FHA – Wants a Mortgage For Low Score Borrowers, But Wants Better Mortgage Performance?

Yes leave it to the government to want the impossible, but FHA is asking lenders to do just that with the FHA mortgage program – they want a mortgage for more low FICO borrowers, but they want lenders to deliver better default rates for the FHA mortgage program.

From Rob Chrisman:

The FHA now expects 25% of the loans it insures will be to borrowers with FICO scores of 640 or below. Another 50% will go to those in the middle ground of 640 to 680. The remaining 25% will be to those borrowers with scores above 680. Efforts have been underway to get lenders to remove so-called credit overlays – FICO score requirements of 680 or more that are used to screen out borrowers with a higher probability of default. Some lenders have lowered credit score requirements this year, largely to drum up business. Many others haven’t budged from imposing credit overlays out of fear they will ultimately be forced to eat losses for any FHA loans that default.

The FHA wants their mortgage program “cake” and they want to eat it too! Rob has more on the default rates that they want lenders to meet for the FHA mortgage program:

The FHA, however, thinks that the defect rate for FHA loans is still too high and defects on FHA loans appear to be on the rise. In June, the FHA provided a breakdown of 6,645 loans it reviewed in the first quarter and found that just 16% were deemed acceptable, meaning they had no mistakes. A whopping 48% were “unacceptable,” with material defects, while another 36% were considered “deficient,” with errors that could potentially be corrected. Lenders are still trying to get their arms around the FHA’s quality assurance plan announced in March. The FHA has said its “blueprint” for evaluating underwriting defects should reduce lenders’ fears of having to indemnify the agency for losses on loans to riskier borrowers.

Obviously someone within the FHA knows that you cannot make a mortgage loan to low score borrowers while seeking low mortgage default rates as FHA has refused to lower the Upfront Mortgage Insurance Premium on each mortgage originated from the current 1.75% as they know they will have higher mortgage default rates with the lower FICO score borrowers.


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