Many banks and financial institutions that were hurt by the 2008 financial crisis tightened their pace of lending and loan originations due to regulations or overall hesitance when making new loans. However, a recent analysis of loans insured by the Federal Housing Administration in years after the crisis found that many were still made to unqualified borrowers, potentially hurting both the borrowers who may default on mortgages as well as taxpayers who back the government agency.
By using risk management software, financial institutions can be confident they will not find themselves in similar situations.
An analysis of 2.4 million loans made in 2009 and 2010 found that potential losses could add up to $10 billion, despite the fact that these loans were made after the burst of the housing bubble. Though Fannie Mae and Freddie Mac are known to have backed fewer loans in the wake of the crisis, the FHA insured similar levels as before.
When looking at the loans made, the analysis found that many were made beyond the standards the FHA had set up – both regarding credit limits and debt-to-income levels. Almost 40 percent of borrowers had monthly debt payments more than half of what their monthly income was, and over half of borrowers were just over the FHA's credit limit.
At the same time, the FHA – as well as Fannie Mae and Freddie Mac – were created for the purpose of supporting the housing market by providing insurance and backing to encourage banks to lend. And the FHA has successfully provided insurance since its creation 80 years ago, stepping in both during the Great Depression and Great Recession to provide the insurance other agencies could not provide due to a lack of government backing.