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Recently Kevin Watters, CEO of Chase Mortgage Banking, compared low FICO, low down payment FHA loans to subprime. While he conflated a couple of FHA’s underwriting criteria, the fact remains that FHA’s core 30-year loan program allows borrowers with a down payment of 3.5% to have a FICO score as low as 580, along with a total debt-to-income ratio of 50% or more.
These loans are subprime based on risk, having an AEI mortgage default risk score under stress of 40%. These are subprime loans based on history: the indicia of subprime have long been impaired credit as represented by a FICO score of less than 660 or a total debt ratio of greater than 42%.
Finally, FHA loans are subprime based on marketing. One of FHA’s major lenders, Carrington Mortgage, ran an advertisement stating – (emphasis added) – “We have loan programs specifically tailored to credit-challenged borrowers so there is no need to turn away those borrowers with low FICO scores.” Today, one third of FHA’s borrowers has a FICO score less than 660, with Carrington having the lowest median FICO score — at 620— of any of FHA’s major lenders. Today, nearly half of FHA’s borrowers have a total debt ratio of greater than 42%. Kevin Watters was right; much of FHA’s lending is subprime.
But there is an alternative for the default-prone FHA loans that don’t reliably build wealth. It is the Wealth Building Home Loan.
From AEI’s International Center on Housing Risk, a report on the “Wealth Building Home Loan: A Straight, Broad Highway to Building Wealth for Low and Middle Income Families Through Home Ownership.”
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