Comments on: FHA Loans: What is “Investor Overlay,” and Why it’s Important

By: s2kreno

s2kreno — Thu, 17 Jun 2010 21:44:23 +0000

FHA’s relationship with lenders is complicated. On one hand, the agency wants to pursue its goal of encourgaging home ownership (whether that’s appropriate is better left for another discussion), and so it imposes fairly lax underwriting standard on the borrowers. However, it is more restrictive with its lenders. If a lender’s default experience is significantly higher than other lenders in its area, it can lose its FHA approval — even if every single origination was in full compliance with FHA guidelines. So if you are lender A, you figure that by imposing stricter requirements yoiu can keep your default % in the lower range for your location. Lender B sees this and responds with tighter guidelines to make sure it doesn’t have a high default % relative to Lender A’s. With FHA loans taking about 1/3 of the market share, that’s a chumk of business no lender wants to risk losing.

By: Karen Lawson

Karen Lawson — Thu, 01 Apr 2010 23:34:26 +0000

Good points, Carl. Thanks for sharing your thoughts. It’s true that if lenders are liable to having their policies held up to scrutiny, they should be allowed to apply such policies as prudently as possible.

By: Carl Pruitt

Carl Pruitt — Wed, 03 Mar 2010 14:29:36 +0000

It’s a catch-22. Even though FHA loans are guaranteed by the insurance fund, lenders are still held responsible for defaults by both FHA and the secondary mortgage market. So lenders will likely choose simply not to offer FHA if they were not allowed to determine their own tolerance for risk and set their own guidelines which might be more strict than those a politicized bureaucracy might set.