Economists' Outlook

Housing stats and analysis from NAR's research experts.

Lenders Optimistic on DTI Change

Fannie Mae recently raised the cap on its maximum debt-to-income (DTI) ratio to 50 percent. Will it help?  NAR Research queried lenders about this change in the Survey of Mortgage Originators for the 2nd quarter of 2017. Lenders were optimistic about the change, but some will maintain overlays to mitigate potential risks.

In July, Fannie Mae began buying and insuring loans with DTIs up to 50 percent. This change was an increase from the DTI cap of 45 percent maintained by Fannie Mae in recent years. Some analysts pointed to this change as a potential expansion of the credit box which would result in more home sales in the face of rising home prices and student debt. Others have panned it as simply taking loans from the Federal Housing Administration (FHA) or other channels.

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57.1 percent of lenders in the survey indicated that the change would result in a modest increase in total originations as more borrowers take advantage of the change. Only 21.4 percent felt that this market segment was already served by the FHA, while 7.1 percent felt that the risk was too great to originate.

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When asked whether they or the investor/aggregator with whom they work would impose an overlay or charge on loans these new loans with DTI>45 percent, only 14.3 percent indicated that they would impose an overlay with an average fee of 0.5 percent.  However, 75.1 percent of respondents were still uncertain suggesting that the share with overlays could rise.

In the wake of the great recessions, lenders pulled back from the risky products, underwriting, and lending practices that helped to foment the market’s downturn. More recently, this pattern has reversed with lenders taking on incremental risks, first with declines in down payments, declines in credit scores, and now modestly higher DTIs. This change may only have a marginal impact on overall lending, but it points to continued recovery in one of the last vestiges of the great recession: tight lending.