Lots of good weekend reading in today’s Linkage. Kicking off with an excerpt from Inside Mortgage Finance about the growth of higher risk loans in 2017 after Fannie and Freddie began allowing borrowers to qualify for a mortgage even when their total monthly housing and non-housing debt is 50% of their monthly income. This can make sense if borrowers have a ton of money left over in the bank or other “compensating factors” but without those factors, it does pose risk.
Fannie Mae adjusted its automated underwriting services last summer to make more loans with higher debt-to-income ratios eligible for approval without lenders needing to provide compensating factors.
In the second half of 2017, there was a small explosion of loans with DTI ratios between 46 percent and 50 percent delivered in MBS issued by the two government-sponsored enterprises, a new Inside MBS & ABS analysis reveals. The two GSEs securitized $52.90 billion of such loans in the second half of the year, up 72.6 percent from the $30.64 billion pooled in the first six months of 2017.
Fannie appeared to have a much bigger increase in such loans than Freddie Mac did. The company has been buying good quality loans with DTI ratios over 45 percent through its automated underwriting system for some time and made no changes last year.
Fannie saw just $14.08 billion of these high-DTI loans in its MBS business during the first half of 2017, before volume more than doubled in the second half. For more details, read the latest edition of Inside MBS & ABS.