Monday, October 07, 2019

A few comments on WaPo story: "Federal government has dramatically expanded exposure to risky mortgages"

by Calculated Risk on 10/07/2019 03:29:00 PM

First a few excerpts from the WaPo: Federal government has dramatically expanded exposure to risky mortgages

The federal government has dramatically expanded its exposure to risky mortgages, as federal officials over the past four years took steps that cleared the way for companies to issue loans that many borrowers might not be able to repay.

Taxpayers are shouldering much of the risk, while a growing number of homeowners face debt payments that amount to nearly half of their monthly income, a threshold many experts consider too steep.

Roughly 30 percent of the loans Fannie Mae guaranteed last year exceeded this level, up from 14 percent in 2016, according to Urban Institute data. At the FHA, 57 percent of the loans it insured breached the high-risk echelon, jumping from 38 percent two years earlier.
First, the standard maximum total debt-to-income (DTI) ratio is 36% for Fannie. This can be increased to 45% if certain criteria are meet (higher credit scores, higher reserves), and even 50% in some circumstances (using DU: Desktop Underwrite).   The article is pointing out that a larger percentage of borrowers now have total DTI above 36%, and that is a little concerning - since it means those borrowers are more leveraged.

But this is nothing like lending during the bubble.

Remember the worst loans during the bubble were the private label loans that layered all kinds of risk. (note: Read Tanta's piece "Reflections on Alt-A").   We aren't seeing any of the crazy private label loans that we saw back then.  There are people trying to blame Fannie and Freddie, but in reality the GSE's were more victims than cause of the housing bubble.

My view is Fannie and Freddie shouldn't be loosening standards, but I don't think these mortgages are that "risky".