Agency worries that too many risky loans are being extended
Worried that lenders are extending too many risky loans, the Federal Housing Administration (FHA) announced that it would start subjecting mortgages to a more thorough manual underwriting process.
According to the Wall Street Journal, the FHA’s decision is a reversal of a 2016 policy that loosens underwriting standards to boost homeownership throughout the country. However, the federal agency is now worried that a rise in defaults may negatively impact its reserves.
“We have continued to endorse loans with more and more credit risk,” Keith Becker, chief risk officer at the FHA, told WSJ. “We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.”
The decision to tighten underwriting standards could mean that first-time homebuyers will find it more difficult to apply for mortgages. Approximately 40,000 to 50,000 loans a year, or 4% to 5% of the FHA-insured mortgages originated annually in the past few years, would likely feel the changes, Becker told WSJ.
Despite increased scrutiny from the FHA, some lenders are confident that the new risk-management process will have a minimal impact on their operations.
“Our analytics and underwriting teams have determined that this new criteria will have a de minimis effect,” Bob Walters, the president of Quicken Loans, told WSJ.
