Politics

FHA loosens lending, is history repeating itself?

fha mortgage

The FHA just changed the rules to let more subprime borrowers into the market, which sounds a lot like how the housing crash got started that we’re still recovering from.

Did you know that the Federal Housing Administration (FHA) is loosening lending for subprime borrowers? A new metric they’ve rolled out to assess the performance of FHA-loan originating lenders will do just that.

The move is raising real estate industry eyebrows, and many tell us they’re having dejavu, as the subprime crash was the first major domino in the entire economy’s collapse that we’re still recovering from.

So how does the new measurement work?

Under the new measurement, the FHA intends to take a deeper dive in evaluating loans that eventually default, which could lead to lenders being stripped of their FHA approval. This measure was proposed a year ago to loosen lending, particularly regarding borrowers with credit scores between 580 and 680 which is said to be millions of potential borrowers.

The metric measures the defaults of borrowers in what the FHA calls “three distinct credit bands,” using an adjusted default rate instead of a weighted average. The lender’s percentage of loans in each band are measured against a benchmark rate for seriously delinquent loans in each band.

Previously, an FHA-approved lender could be cut from the program if their default rate went above a certain threshold, but the new measurement loosens that metric. This segment of lenders has long shied away from this segment of the market to avoid risking their FHA approval, but Uncle Sam intends to change that.

Is this the sign of a future housing crash?

For years after the crash, the National Association of Realtors stuck to the drumbeat that lending standards must be loosened, but that talking point has slid out of their press releases and their primary concern has transitioned to housing affordability.

So if the NAR is focused squarely on affordability, does this FHA put a dent in that challenge? Time will tell.

Analyst Charles Payne opined today that this is no more than a move to “curry favor” with voters and buy their votes. Others have opined that this is a long overdue move for an overly restrictive lending environment that has overreacted to the crash.

The bottom line is that while this could help bring back the first time buyer market which shrank after the housing crash, it is reminiscent of Barney Frank’s literal yelling about serving the subprime market which paved the way toward a historic crash that we’re still reeling from.

Time will tell if this lone measure sets the housing market up for another failure, or if it is a simple way to gin up some home sales.

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