The Federal Housing Administration (FHA) announced Monday a new method that will be used to evaluate the lending practices of FHA-approved lenders and help them understand the type of borrowers they are serving.
“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.”
The new method, FHA’s Supplemental Performance Metric will work jointly with the agency’s existing ‘compare ratio’ and offer different insight into a lender’s specific performance while encouraging lenders to serve eligible borrowers that are not necessarily credit worthy.
FHA lenders will be able to see the impact of their business at all ends of the credit spectrum with the new supplemental performance metric, the FHA says. This will fall in line with the FHA’s willingness to insure loans to eligible borrowers with lower credit scores.
Currently, the FHA calculates a ‘compare ratio’ for all FHA-approved lenders. This ratio compares a lender’s rate of early defaults and claims for insured single family mortgage loans to other approved lenders in a geographic area. Compare ratios identify lenders with a large amount of default and claim rates compared to their counterparts and which lenders FHA may terminate.
The FHA noted that lenders placed concerns about the compare ratio being a comparison to one’s peers rather than to FHA’s risk tolerance, which the Supplemental Performance Metric responded to.
The metric, along with the compare ratio, provides a more granular, nuanced look at lender performance by measuring default rates and claims in three distinct credit bands. Additionally, lenders will have a better understanding of who they are serving, according to the announcement.
In May 2014, FHA proposed the development of a Supplemental Performance Metric—one component of FHA’s Blueprint for Access to Credit initiative, an effort to expand access to mortgage credit to underserved borrowers.
This new complementary metric was made available at end of the July 2015 in FHA’s Neighborhood Watch Early Warning System. The new metric is designed to help mitigate adverse selection of borrowers with certain credit profiles and encourage the extension of homeownership opportunities to underserved segments of the market.