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The private subprime market depended on the substantial liberalization of underwriting requirements that arose out of the housing bubble during 2000-2007. The prevailing assumption was that rising house prices would convert the otherwise weak subprime loans into good loans — which they did, until the bubble burst and the default rate ballooned.

In a similar vein, the FHA subprime market today depends on FHA’s very liberal underwriting requirements. FHA requires a down payment of only 3 percent, and has no minimum credit score. Further, the mortgage insurance premium does not vary with the credit score. While FHA borrowers in total have an average score of about 700, a small group of FHA borrowers have scores below 620. This is the subprime lender’s target market.

Most mortgage lenders do not take advantage of this, imposing underwriting “overlays,” which set requirements more restrictive than FHA’s. The reason is that they want to retain their status as approved FHA lenders. They know that if the default rate on the loans they submit exceeds some limit set by the agency, they will lose their FHA accreditation. None of the six lenders offering FHA loans on my website, for example, will accept a credit score below 640.

But there is a small group of lenders that will accept any score, their only concern being whether they can get it through FHA. Because of what I do, I am solicited by these people every day, and the emails they send me are outrageously misleading and dishonest.

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