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Nonbanks Inflating Mortgage Bubble Again
Friday, April 10, 2015 6:10 AM

The National Mortgage News says large banks have practically given up on making loans to riskier borrowers backed by the Federal Housing Administration, while thinly-capitalized nonbanks have taken their place, a new study has found. (National Mortgage News, April 7, 2015).

Nonbanks have less capital to indemnify the government for faulty loans yet they now dominate home-purchase loans backed by the FHA, according to the study by the American Enterprise Institute's International Center on Housing Risk.

Large banks' share of FHA-backed home loans fell to 29.6 percent in February from 65.4 percent in November 2012, when the center first began tracking the data. By contrast, nonbanks' share jumped to 62.2 percent in February from 26.8 percent over the same period, virtually replacing the share ceded by large banks.

A growing concern is that if the economy sputters and employment drops, defaults would rise dramatically, putting low and moderate income borrowers at greater risk of losing their homes. Such a scenario would cause another round of financial stress to the FHA, experts say, since the agency would have a harder time making lenders eat the losses on poorly underwritten loans. That would then place the FHA and taxpayers are going to be on the hook once again.

The FHA's mortgage insurance fund's capital reserve ratio is at 0.41 percent, still far below its statutory minimum of 2 percent.

The FHA is also exempt from so-called qualified mortgage requirements such as a maximum 43 percent debt-to-income ratio.

The FHA will insure loans to borrowers with FICO scores as low as 580 with a down payment of 3.5 percent or more. Borrowers with FICO scores as low as 500 can get an FHA loan but they must have at least a 10 percent down payment.