The Federal Housing Administration recently announced a new method for evaluating the lending practices of FHA-approved lenders and understanding the sorts of borrowers they are serving. FHA’s new Supplemental Performance Metric will complement the agency’s existing ‘compare ratio’ and offer more nuanced insight into a lender’s specific performance while encouraging lenders to serve eligible underserved borrowers.
The new supplemental performance metric will help FHA lenders see the impact of their business at all ends of the credit spectrum in line with FHA’s willingness to insure loans to eligible borrowers with lower credit scores.
“This is one more tool to help FHA, lenders, and the public, know exactly who we’re serving,” says Ed Golding, Principal Deputy Assistant Secretary for Housing. “By better understanding FHA’s acceptable risk tolerance levels for a variety of credit scores, lenders will have the confidence to lend more broadly and FHA will have more data on how successful those lenders are.”
The Supplemental Performance Metric responds to lender concerns about the Compare Ratio being a comparison to one’s peers rather than to FHA’s risk tolerance. By measuring default rates and claims in three distinct credit bands, the metric compliments the Compare Ratio, providing a more granular, nuanced look at lender performance, with the added benefit of better understanding of who lenders are serving.
In the spring of 2014, FHA proposed the development of a Supplemental Performance Metric—one component of FHA’s Blueprint for Access to Credit initiative, an effort to expand access to mortgage credit to underserved borrowers. Effective by the end of the July 2015, this new complementary metric will be available in FHA’s Neighborhood Watch Early Warning System. The new metric is designed to help mitigate adverse selection of borrowers with certain credit profiles and encourage the extension of homeownership opportunities to underserved segments of the market.
FHA currently calculates a ‘Compare Ratio’ for all FHA-approved lenders. This ratio compares a lender’s rate of early defaults and claims for insured single family mortgage loans to other approved lenders in a geographic area. Compare ratios are used to identify lenders with excessive default and claim rates compared to their peers and which lenders FHA may terminate.
For more information, visit www.hud.gov.