The Challenges of Balancing Mortgage Risk and Access

Striking a balance between default risk and credit access can be an onerous, if not impossible, task to undertake, Urban Wire reports. Take some recent, well-intentioned efforts by Fannie Mae, which tweaked its underwriting criteria to loosen access to mortgage credit. That move caused several private mortgage insurers (PMIs) to stiffen their guidelines for insuring mortgages for borrowers with debt that is 45 percent or more of their income. Some will insure mortgages for these borrowers only when their credit scores are 700 or above, while others will charge steeper fees for insuring these mortgages, Urban Wire notes.

First, the backstory. Effective July 29, 2017, Fannie Mae eased underwriting criteria by increasing the maximum debt-to-income ratio a borrower could have and still qualify for a Fannie-backed loan from 45 percent to 50 percent.

The PMIs quickly realized that Fannie’s adjustment actually upped the risk that these mortgages would default, Urban Wire says. Beforehand, the share of the GSE’s monthly issuances with DTI ratios eclipsing 45 percent was routinely 6 or 7 percent. But by September, this share shot up to nearly 8 percent. By February, it had practically tripled to around 20 percent.

“Fannie Mae’s move eased credit availability and increased the volume of high-DTI (debt-to-income) loans, many of which also had high loan-to-value (LTV) ratios,” Urban Wire reported. “This forced the PMIs to react.”

In response, Fannie recalibrated the risk assessment criteria within its Desktop Underwriter to partially temper the risk of high-DTI loans (effective March 17).

“We would expect PMIs to re-evaluate their overlays as the new loans roll in,” Urban Wire said. “We also expect the number of high-DTI loans to eventually settle in at a higher volume than before the change but lower than we have today.”

Missteps like these are a good reminder that loosening access without tolerating more risk is an iffy proposition, Urban Wire says.

“Despite widespread agreement that credit is too tight, this episode reminds policymakers how well-intentioned efforts to improve credit availability can be complicated to enact and have unintended consequences,” the company said. “As we work to reform the housing finance system, transparency and careful analysis will be critical to our success.”