FRBNY: FHA Should Impose Cap on Borrowers’ Default Rates

According to a recent Federal Reserve Bank of New York (“FRBNY”) blog post, policy to increase homeownership rates should make homeownership not only more affordable but also more sustainable, which could be accomplished if the Federal Housing Administration (“FHA”) imposed a cap on borrowers’ cumulative default rates (“CDRs”) at the time of the mortgage origination. The FRBNY argues the expected CDR should reflect the borrower’s credit score, the loan-to-value ratio of the mortgage and the economic outlook. According to the blog’s authors, “An acceptable cap on the expected CDR should balance the benefits of increased access to homeownership against the personal and social costs of foreclosure when the homeownership ends in default. Affordability has the biggest impact if the household’s ownership experience is a success.”

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