FHA Takes Action to Mitigate Rising Credit Risk in Single-Family Mortgages

Citing rising credit risk in its single-family loan portfolio, the Federal Housing Administration this month reintroduced manual underwriting requirements for single-family mortgages with credit scores under 620 and debt-to-income ratios exceeding 43 percent. “The lender’s final underwriting review decision for those mortgages must be documented in accordance with existing FHA requirements for manually underwritten mortgages,” FHA said, noting that the requirements took effect on March 18.

The guidance from FHA reverses a decision made in August 2016 to remove manual underwriting requirements, which FHA said has resulted in greater concentration of high-credit-risk loans in FHA’s single-family portfolio. For fiscal year 2018, the average borrower credit score was 670—the lowest since 2008—with a growing concentration of sub-640 scores combined with DTI ratios of over 50 percent. “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.