FHA’s Underwriting Policies Hurtful To Potential Homebuyers, Not All Hope Lost

The Federal Housing Administration’s mission is to give wishful homeowners with low and moderate-income levels the dream of becoming first-time homebuyers—but that isn’t necessarily what happens. Edward Pinto, resident at the American Enterprise Institute (AEI) claims that instead of giving potential buyers a shot at the American dream, the administration has instead put “a high percentage of low and moderate-income families and communities at risk of excessively high foreclosure rates.” A recent study by Pinto found that more than 9,000 U.S. zip codes have a projected foreclosure rates exceeding 10 percent on loans backed by FHA. The study looked at 2.4 million FHA loans from 2009 and 2010. Those numbers indicate that 1 in 7 families in the zip codes will likely lose their home to foreclosure. The zip codes assessed account for 44% of all FHA loans that are in the low and moderate-income zips.

What Does This Mean For New Homebuyers?

The proposed solutions to mitigate this issue are in fact no help to this bracket of lower-level income buyers. The problem is not the FHA’s decision to provide credit to low and moderate-income families, it is the issue of the FHA straying away from providing “responsible” mortgage credit. What is considered “responsible”? Well, Pinto finds that the FHA’s underwriting policies encourage risky financial decisions from these lower income families through low down payments, high debt-to-income ratios, 30-year loan terms and by providing loans to borrowers with low credit scores. Pinto contends that this sets families up for failure—turning their hopes for the American dream into a nightmare. Solutions to this issue all surround reforms that refocus the FHA on responsible lending. This includes “guaranteeing lower-risk loans and high dollar-balance borrowers.” Another key step is revising the underwriting policies that result in balancing down payment, loan term, FICO score, and debt-to-income ration for “meaningful equity.” This will undoubtedly exclude many potential homebuyers from purchasing a new home.

Mary Pope-Handy, a realtor in Los Gatos, CA, notes that there is in fact a plus side with the FHA. She notes that the down payment with FHA can be gifted partially, or in full. “If you are an FHA buyer in Santa Clara County and your relatives want to assist you with the down payment, you’re in luck! It’s easy to factor that in, and easy to improve your position if you can up your down payment that way.” Much of Silicon Valley is a seller’s market, which makes it difficult for buyers in general, regardless of income level. FHA buyer’s motivation and attentiveness to the market are the most important elements in becoming a first-time homebuyer!