Earlier this year, the government-sponsored enterprise (GSE) said it would consider mortgage applications with DTI ratios up to 50% in its automated underwriting system (AUS), an increase from the previous 45% limit. The hike will take place on July 29, the Washington Post
The Urban Institute estimated that Fannie Mae will approve 85,000 loans and Freddie Mac will purchase 15,000 new loans. The 100,000 total would comprise 5,000 loans shifting from the FSA to the GSEs, thus resulting to the 95,000 figure.
It arrived at the estimate by taking into account the expected expansion in Fannie Mae loans as well as its impact on Freddie Mac and Federal Housing Administration loans.
In terms of the borrowers, the study projected that 16,000 (16.5%) of the 95,000 new mortgages will be made to black families and Latino families. Specifically 11,500 loans to Latino families and 4,500 black families. The figures are based on the study’s computation that black and Latino families are approximately 1.5 times more likely to have DTI ratios of more than 45%.
The study further found that the new mortgages will have low risk levels, as the AUS will still evaluate these. It estimated that the new mortgages would have default probability of only 31% higher compared to mortgages with the current median DTI and similar loan characteristics.
Even before the increase, Fannie already considered applications with DTI up to 50% for certain cases with strong compensating factors. But this flexibility was only extended to mortgages with loan-to-value ratios of less than 80%.
The Urban Institute expects authorities and Fannie Mae to monitor the risk of loans in the 45% to 50% DTI bucket. If the loans perform as predicted, it believes the government and the GSEs will look at similar opportunities resulting in a “substantial number” of additional mortgages with “little additional risk” to the GSEs.
“Further relaxing the limit from 50 to 55 percent DTI, using Fannie Mae numbers alone, would bring
in about 120,000 (4.7 percent of 2.5 million) mortgages, the overwhelming majority of which are not
being made today,” said the report. “Adding Freddie Mac would increase this significantly more, as Freddie has few mortgages over 50 percent DTI.”
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Over 95,000 new loans could be approved annually following Fannie Mae's hike of its debt-to-income (DTI) ratio limit, according to a study by the Urban Institute.