LET’S GET HOUSING REFORM RIGHT THIS TIME. According to an article on AmericanBanker.com, as policymakers consider reforms to the role the federal government plays in the mortgage and housing markets, it’s critical to assess the amount of risk to U.S. taxpayers through loans insured by the government, and securitized by the government-sponsored enterprises Fannie Mae and Freddie Mac.
In considering these risks, it’s also important to understand the positive changes in the last decade to ensure that the loan features that triggered the 2008 financial crisis — no documentation, teaser rates, exploding adjustable-rate mortgages — have been eradicated from the market.
American Banker’s organizations worked alongside Congress, the Consumer Financial Protection Bureau, the Federal Housing Administration, the Federal Housing Finance Agency and the Department of Housing and Urban Development to promote reforms that helped eliminate the risks that resulted in the subprime housing crisis, while maintaining affordable mortgage credit for qualified homebuyers.
Recently, the discussion on mortgage risk has been colored by a single-minded focus on just one factor that lenders use to examine a borrower’s likelihood to repay a mortgage: the debt-to-income ratio.
Yes, the DTI is important. But it is just one of many considerations lenders use in combination when evaluating whether a borrower can and will repay a loan. Other factors including credit history, cash reserves, property equity and liquid assets also help to paint a more complete picture of a borrower’s true credit profile; and the true risks assumed by a lender.
Numerous studies have determined that DTI by itself is a weak predictor of a loan’s likelihood of default. Other recent studies have shown that a borrower’s liquid cash reserves are a far more important indicator of risk when unemployment is rising.
These more comprehensive characteristics, along with new laws passed in the wake of the crisis, ensure a greater focus on sustainable mortgage lending activities to creditworthy borrowers and prevent excessive risk taking. As a result, rates of serious delinquency and foreclosure remain at or near-historic lows across both GSE and FHA mortgages.