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FHA compare ratio and HUD Credit Watch

The FHA compare ratio is your early default and claim rate on FHA loans divided by the rate for all lenders in the same area, times 100. Above 150 in a HUD field office area, you are on Credit Watch. Above 200, and above the national rate, HUD may terminate your authority to originate or underwrite there.

How HUD calculates it

HUD's Neighborhood Watch Early Warning System defines it by example: if a lender has an 8% default rate in California and 4% of all California loans defaulted, its compare ratio is 200%. The baseline can be an area or another lender. You reach it through FHA Connection; Early Warning data refreshes monthly.

The regulation never says "compare ratio." 24 CFR 202.2 measures everything against the "normal rate": the default and claim rate for the area a HUD field office serves, or another area HUD designates. A default is an insured loan 90 or more days in default within 24 months after it was insured. A claim is one HUD pays within that same window.

Handbook 4000.1 adds the timing: FHA reviews rates quarterly, counting only loans with an amortization date in the preceding 24 months. In Neighborhood Watch, use the "Seriously Delinquent" option for Credit Watch analysis, and remember its counts can include loans that later cured.

The thresholds

LevelTestWhat can happenSource
Credit Watch StatusYour rate in an area is above 150% of the normal rateYou are on Credit Watch and responsible for monitoring your own rates24 CFR 202.3(c)(2)(ii)
Termination causeYour rate in an area is above 200% of the normal rate and above the national default and claim rateHUD may give notice ending origination and/or Direct Endorsement authority there, 60 days after the notice24 CFR 202.3(c)(2)(iii)
Lender InsuranceLI Compare Ratio at or below 150% (loans you underwrote vs. all mortgagees in the same states, two-year period)Required to obtain LI authorityHandbook 4000.1 I.A.5.b

Under 24 CFR 202.3(c)(2), origination and underwriting are separate tests. A high rate on loans you originated puts your origination approval at risk; a high rate on loans you underwrote puts your Direct Endorsement approval at risk. HUD can also review a branch on its own and terminate that branch or the whole operation. Before sending a notice, HUD checks census-tract concentrations and may hold off if the high rate comes from lending in underserved areas.

A worked example

Illustrative numbers only. Your loans in one field office area that began amortizing in the past 24 months have a 3.6% default and claim rate. The area rate is 1.5% and the national rate is 2.0%.

  1. Compare ratio: 3.6 ÷ 1.5 × 100 = 240.
  2. Credit Watch Status: 240 is above 150.
  3. Termination test 1: 3.6% is above 200% × 1.5% = 3.0%.
  4. Termination test 2: 3.6% is above the 2.0% national rate.

Both termination tests are met, so HUD may send a proposed termination notice after its underserved-area check. At a 4.0% national rate, test 2 fails: you are on Credit Watch but don't meet the termination cause.

If you get a notice

You can request an informal conference in writing with the Deputy Assistant Secretary for Single Family Housing or a designee. 24 CFR 202.3(c)(2)(iv) says HUD must receive your request within 30 calendar days of the notice date, while the Handbook says within 30 days of receipt. Plan to the notice date. The conference is held within 60 days of the notice unless extended, and HUD may withdraw the notice over factors beyond your control.

Under Handbook 4000.1 V.E.3.a.iii, if you don't request a conference, your authority ends 60 days from the notice date. If you do and HUD sustains the termination, it takes effect when you receive the Final Notice of Determination. Once a proposed termination notice for origination approval arrives, you can't open a new branch to originate FHA loans in the cited area until HUD withdraws the notice or reinstates you (24 CFR 202.3(c)(2)(v)).

The Handbook limits termination to the field office area named in the notice, and your general FHA approval stays. Loans a DE underwriter approved, or that got a Firm Commitment, before termination can still be endorsed; earlier-stage cases can go to another mortgagee.

24 CFR 202.3(e) and the Handbook let you apply for reinstatement after six months. You need an independent CPA analysis of the underlying cause and a corrective action plan with evidence it is in place, filed through LEAP.

Where your QC plan comes in

Your QC plan is where you catch the causes before they show up in the rate. Handbook 4000.1 V.A.3.a defines an early payment default (EPD) as a loan that goes 60 days delinquent within the first six payments. You must review every EPD you underwrote, no matter who services it, except for a narrow disaster-area carve-out. Select EPDs monthly and finish each review within 60 days of the end of the month you selected it. Neighborhood Watch can help you find them. Your discretionary sample must target high-risk programs, participants or sources, which can include default rates.

The EPD window (60 days within six payments) is much tighter than the Credit Watch window (90 days within 24 months). EPD reviews are your earliest look at the loans that drive the rate HUD measures.

HUD's own loan reviews

FHA records its post-endorsement reviews in the Loan Review System (LRS) and classifies findings with the FHA Defect Taxonomy, Appendix 8.0 of Handbook 4000.1. Each finding gets a defect area, source, cause and one of four severity tiers. Tiers 1 and 2 are unacceptable, need your response and remedy in LRS, and line up with the Material Finding definition for your own QC. Tiers 3 and 4 need no response. You can rebut in LRS, and you may use the taxonomy as a reference for your own reviews. The Handbook addresses mail for HUD's Quality Assurance Division care of the Office of Lender Activities and Program Compliance.

Flightline reviews complete FHA loan files and ties each finding to the evidence page and the requirement it cites, so your EPD reviews can start from the same findings. You still own the QC plan, the monitoring of your default rates and your responses to HUD.

How Flightline checks this

HUD calculates your compare ratio, and no vendor changes how it is measured. What a lender controls is the quality of the FHA files behind it. Flightline reviews FHA files against HUD Handbook 4000.1 and your QC plan, before or after closing, with program tests such as FHA UFMIP alongside its credit, income and asset tests. "A full-file review typically comes back within the hour," so a defect can be found while there is still time to act on it.

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FAQ

Is a compare ratio above 150 a violation?

No. It puts you on Credit Watch Status. Termination takes a rate above 200% of the area rate that is also above the national rate.

What counts as a default for Credit Watch?

A loan 90 or more days in default within 24 months after it was insured. A claim HUD pays within the same 24 months counts too.

Is an early payment default the same as a Credit Watch default?

No. An EPD is a loan 60 days delinquent within the first six payments, and it drives your QC reviews. A Credit Watch default is 90 days in default within 24 months.

What does the FHA compare ratio measure?

Your rate of early defaults and claims on FHA loans, divided by the rate for all lenders in the same HUD field office area, times 100. A default is a loan 90 or more days delinquent within 24 months after it was insured, and a claim is one HUD pays within that window (24 CFR 202.2).

Is a low FHA compare ratio good?

Yes. At 100 your early defaults and claims match the area; below 100 you have fewer than the area. HUD's Credit Watch action starts above 150, and termination is possible above 200 when your rate also exceeds the national rate (24 CFR 202.3(c)(2)).

What period does the compare ratio cover?

A rolling two years. HUD reviews default and claim rates quarterly, and "the review is limited to Mortgages with an amortization date within the preceding 24 months" (Handbook 4000.1 V.E.3.a.iii(A)), so older loans age out every quarter.

Sources

This guide summarizes agency requirements as of the date above. It is not legal advice.

See the requirement behind every finding.

Flightline reviews full loan files and cites the guideline and source document behind each finding.

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