Specifically, the proposal addresses the use of debt service coverage ratios, also known as "back-end ratios
" which refer to the ratio of the mortgage payments relative to all of the borrowers' debt payments, to assign risk weights to mortgages held by Basel III-compliant institutions.
This led to abuses of the automated underwriting systems and borrowers getting loans with back-end ratios
that consumed 65 percent to 70 percent or more of their true income.
With the greatest respect for underwriters and particularly those trained for the FHA programs, the landscape of what matters (e.g., front-end and back-end ratios
, bankruptcy and foreclosure status, and the number and nature of late payments) is no longer a black-and-white calculation or captured on a document, or even a viable measure of creditworthiness when taken together (as we are learning from loan workouts).
Simulated loan applicants were characterized by income and desired loan amount, loan-to-value ratio, front and back-end ratios, a qualitative measure of credit history, and race.
The greater the number of imperfections, the greater the likelihood of rejection, as various threshold levels are reached (for example, a 40 percent back-end ratio or 95 percent LTV).
Front-end or back-end ratios
in and of themselves are not always reliable predictors of loan performance.