The Impacts of More Rigorous FHA Underwriting Guidelines

Alastair McFarlane

Impact

A regulatory impact analysis must accompany every economically significant federal rule or regulation. The Office of Policy Development and Research performs this analysis for all U.S. Department of Housing and Urban Development rules. An impact analysis is a forecast of the annual benefits and costs accruing to all parties, including the taxpayers, from a given regulation. Modeling these benefits and costs involves use of past research findings, application of economic principles, empirical investigation, and professional judgment.

As with the articles in this issue, this introduction reflects the views of the authors and does not necessarily reflect the views of the U.S. Department of Housing and Urban Development.

The Federal Housing Administration's (FHA's) authorizing statute for insurance authorities, the National Housing Act, clearly states that the U.S. Department of Housing and Urban Development (HUD) will adjust program standards and practices to operate the Mutual Mortgage Insurance Fund (MMIF) on a self-sustaining basis. In the Notice "Federal Housing Administration Risk Management Initiatives: Reduction of Seller Concessions and New Loan-to-Value and Credit Score Requirements," FHA proposes to tighten portions of its underwriting guidelines that present an excessive level of risk to both homeowners and FHA. The benefit of the set of actions outlined in the Notice will reduce the net losses resulting from high rates of insurance claims on affected loans, and the cost of the action will be the value of the loan opportunity denied to the excluded borrowers. The total transfer to FHA would be $96 million, and the net cost of excluding borrowers could be as high as $85 million.