The Federal Housing Administration (FHA) and Fannie Mae recently launched programs that are designed to open credit to borrowers who would not be able to obtain a mortgage loan under normal circumstances.
In two new blogs, the Urban Institute analyzed how the FHA’s Supplemental Performance Metric and Fannie Mae’s Home Ready program are opening up more lending options to borrowers with lower credit scores.
In the FHA blog, author Karan Kaul, a research associate at Urban Institute, discusses how FHA lending has fallen among consumers with low credit scores, but the new metric could be the solution to bolster lending.
“This is one more tool to help FHA, lenders, and the public, know exactly who we’re serving,” said Ed Golding, principal deputy assistant secretary for Housing. “By better understanding FHA’s acceptable risk tolerance levels for a variety of credit scores, lenders will have the confidence to lend more broadly and FHA will have more data on how successful those lenders are.”
Normally, FHA examines lender performance using the compare ratio, which compares the early stage weighted average of seriously delinquent rate of a lender’s FHA loans to that of all FHA-insured loans.
The FHA’s new metric will be used jointly with the compare ratio and will determine lender performance more accurately. This extra step in the process will “make enforcement less dependent on lender loan mix and allow the FHA to target lenders with worsening loan performance as opposed to those serving more underserved borrowers,” Kaul noted.
Fannie Mae’s HomeReady program was introduced to serve the millennial generation, who are not as financially stable to purchase a home, according to Urban Institute’s Laurie Goodman and Eva Wingren.
The program allows borrowers to put as little as 3 percent down and expands lending options to all qualified buyers. In addition, HomeReady also has the potential to reduce poverty and educate borrowers on the home buying process. However, Urban Institute warns that lower-credit buyers could pay more risk-based fees in return for low downpayment options.
"Our priority is a safe, responsible balance between expanded access to mortgage financing and the long-term viability of today’s mortgage loans—limiting risk to lenders, investors, homeowners, and taxpayers," Fannie Mae said. "Our goal is straightforward: to work with lenders to make mortgages more accessible, affordable, and sustainable."
Click here to read Urban Institute's FHA blog.
Click here to read Urban Institute's Fannie Mae blog.