DEC 9, 2013 9:45am ET

FHA Turns to Manual Underwriting to Reach More Borrowers

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The Federal Housing Administration wants lenders to use manual underwriting more often as a way to identify and approve more qualified borrowers for FHA-insured loans.

FHA has “enhanced” its automated underwriting system Total Scorecard to reduce the number of applicants that are automatically approved or rejected, according to FHA commissioner Carol Galante. And lenders will be directed to use manual underwriting to get applicants approved. FHA will be issuing new guidance on manual underwriting later this month.

“Using manual underwriting more frequently gives lenders the tools to know how and when to apply compensating factors to determine borrower qualifications,” says Galante. “Relying solely on a credit score or the size of the downpayment excludes qualified families and holds back our nation's economic recovery.” She spoke at a Consumer Federation of America financial services conference last Friday.

FHA wants to expand access to credit for “responsible, qualified” borrowers next year, Galante stressed, to better serve its traditional borrowers with 620-680 credit scores. 

The housing commissioner noted that only 45% of FHA borrowers had sub-680 credit scores in fiscal year 2013. Before the mortgage meltdown, they used to be 80% of FHA's business.

However, Fannie Mae, Freddie Mac and private lending programs have not

filled this gap even as FHA has raised its mortgage insurance premiums over the past five years. She blames tight underwriting, credit overlays and a lack of lender confidence for the shortfall in lending to FHA's traditional customers.

But Galante indicated that FHA isn't ready to reduce its mortgage insurance premiums to reach more of those sub-680 borrowers. And FHA won't raise its premiums either because it would decrease loan volume and restrict access to credit. FHA loan endorsement volume has recently fallen back to 2003 levels.

Many lenders, real estate agents and consumer groups contend the agency has priced its premiums too high and it has reduced endorsements. 

But private insurers claim “our prices are too low and give FHA an advantage with our traditional borrowers,” she told the CFA audience. “No one is more concerned about getting this right than I am.”

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