Insurers push back on Fannie Mae policy change

Insurers are refusing to back certain mortgage applicants, despite Fannie Mae approval. The pushback comes less than a year after Fannie Mae eased its debt-to-income (DTI) requirements, allowing borrowers with DTI of up to 50 percent to obtain low down payment mortgages, assuming the borrowers fell within other risk benchmarks.

Fannie Mae’s policy change was welcomed by housing advocates who said it would open the housing market up to credit-worthy people with high debt loads. The Urban Institute estimated that the shift could assist 95,000 new borrowers annually.

DTI is a significant factor in mortgage decisions. If your DTI is too high, you’re considered at risk for missing mortgage payments. A Federal Reserve study found that failing the DTI test is the number one reason mortgage applicants get rejected.

At first, the rule change did appear to attract new borrowers. Before the shift, Fannie Mae’s monthly issuances of loans with DTI ratios exceeding 45 percent were roughly 5 to 7 percent. But by February 2018 they had reached around 20 percent of new purchase loans.

Private mortgage insurers, who play a key role in low down payment mortgages, began pushing back. Effective March 1, the Mortgage Guaranty Insurance Corporation (MGIC) announced that it would require a credit score of at least 700 to insure a loan with DTI exceeding 45 percent. Essent Guaranty and Genworth soon followed suit. Radian Guaranty, another key player, took a different tack, nixing high DTI loans with a down payment of less than 5 percent.

As a result of the push back, Fannie Mae acknowledged that multiple-risk applicants were getting through its automated underwriting systems. It announced plans to revise the tool with expectations of approving fewer high-DTI mortgages in the future.

Lenders and housing advocates say that tighter policies from insurers could limit purchasing opportunities, particularly among minorities. According to the Urban Institute, Latinos and African Americans tend to carry higher DTI scores than the general population.

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