Study Argues FHA’s Underwriting Policies Set Families Up for Failure

The ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration (FHA) has a mission of making the American dream of homeownership accessible to low- and moderate-income families and first-time homebuyers.

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However, due to FHA's underwriting policies and practices, Edward Pinto, resident at the American Enterprise Institute (AEI), argued the administration has instead put ""a high percentage of low- and moderate-income families and communities at risk of excessively high foreclosure rates.""

According to a recent ""study"":http://www.aei.org/files/2012/12/12/-how-the-fha-hurts-workingclass-families-and-communities_211636397460.pdf released by Pinto, more than 9,000 U.S. ""zip codes"":http://www.nightmareatfha.com/how-to-read-the-data/ have a projected foreclosure rate exceeding 10 percent on loans backed by FHA, with the average projected foreclosure rate at 15 percent. The study looked at 2.4 million FHA loans from 2009 and 2010.

Based on those numbers, the study says 1 in 7 families in the zip codes will likely lose their home to foreclosure. The zips assessed account for 44 percent of all FHA loans that are in the low- and moderate-income zips.

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The problem though is not FHA's decision to provide credit to low- and moderate-income families. Pinto instead sees it as an issue of FHA straying away from providing ""responsible"" mortgage credit.

""[T]he real choice is between responsible and irresponsible underwriting polices targeted at low- and moderate-income families,"" the report stated.

The report says FHA's underwriting policies encourage risky financial decisions from low- and moderate 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.

The combination, Pinto contended, set up those families for failure; as a result, the ""hope for the American dream turned into a nightmare.""

These borrowers, Pinto says, are just ""a car repair away from failure.""

According to the study, the results of high foreclosure rates also hurts working-class communities by increasing blight and crime, decreasing property values, and reducing the tax base, among other problems.

In order to mitigate the problem, the study listed five specific reforms to refocus FHA on responsible lending. One of the steps advised FHA to end ""guaranteeing lower-risk loans and high-dollar-balance borrowers."" Another step, naturally, advised implementing underwriting that results in balancing down payment, loan term, FICO score, and debt-to-income ratio for ""meaningful equity.""