Riskier mortgages on the rise

by Anna Sobrevinas15 Mar 2017
Risky mortgages are making up a larger share of new home loans, raising worries that defaults could spike and stymie the housing recovery, according to a USA Today report.

The trend in riskier loans seems to be concentrated in mortgages insured by the FHA, according to USA Today. FHA loans normally require down payments as low as 3% to 5% – an enticing percentage to first-time buyers. And many nonbank lenders are offering these loans with less-stringent credit standards than banks.

“We have a situation where home prices are high relative to average hourly earnings and we’re pushing 5%-down mortgages, and that’s a bad idea,” Hans Nordby, chief economist of real estate research firm CoStar, told USA Today.

The issue when home prices “peak and dip” – homeowners who only have a 5% down payment and are less creditworthy would suddenly find their homes underwater. The temptation would be to default, and foreclosures would set off price declines, triggering more defaults, and so on.

Money for nonbank lenders would dwindle, making FHA loans harder to attain, which would further dampen the housing market.

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