The FHA tries to boost homeownership by insuring loans to borrowers with less-than-stellar credit, lessening the risk for lenders. The agency is worried that lenders are making loans to borrowers who can’t repay, leading to a spike in defaults that strains the agency’s reserves.
The move is an about-face from a 2016 decision to loosen underwriting standards. At the time, the FHA removed an earlier rule that required manual underwriting for mortgages with credit scores below 620 and a ratio of debt to income above 43%.
“Since that happened, we have observed a steady increase in the endorsement of higher-risk loans,” Mr. Becker said. The FHA has also been warning of rising risks in the portfolio that it insures in its annual reports submitted to Congress.
Many flagged loans likely won’t pass muster under FHA rules, Mr. Becker said. Lenders ultimately decide whether the flagged risks are offset by other borrower attributes, which would allow them to receive an FHA-insured loan under the agency’s guidelines.
Some lenders say they don’t expect the FHA’s risk-management steps to affect their businesses. “Our analytics and underwriting teams have determined that this new criteria will have a de minimis effect,” said Bob Walters, the president of Quicken Loans, in a statement.
In the previous fiscal year, almost a quarter of FHA-insured mortgages were made to borrowers with a debt-to-income ratio above 50%, having risen sharply in recent years. The average credit score for borrowers fell to 670, the lowest level in a decade. In the FHA’s letter to lenders, it noted a rising concentration of loans with high debt-to-income ratios and low credit scores.