Mortgage lenders who originate Federal Housing Administration loans face tougher underwriting requirements under a rule being proposed. Another change will impact which mortgagees have their origination agreements terminated.
New regulations were proposed Friday by the U.S. Department of Housing and Urban Development.
The agency wants to increase its authority to hold mortgagees liable for insurance claims paid on loans that don’t meet its guidelines.
Mortgagees would be required to indemnify HUD if they failed to “verify and analyze the creditworthiness, income, and/or employment of the borrower.” Other infractions that would require indemnification include not verifying the sources of downpayment assets and failing to ensure that the property appraisal satisfies FHA appraisal requirements.
HUD also plans to require payment if the mortgagee doesn’t address property deficiencies identified in the appraisal that impact the health and safety of the occupants or the structural integrity of the property.
“HUD may seek indemnification irrespective of whether the violation caused the mortgage default,” the news release said.
In its proposed rule, HUD would require all new and existing FHA lenders to meet stricter performance standards in order to obtain mortgagee approval or to maintain their approval status. Mortgagees will be required to maintain a claim rate over the prior two years at no higher than 150 percent of rate in the states where they operate. The current rule is 150 percent based on either the state or national average.
HUD said it has the authority — at its own discretion and without any judicial or administrative action — to immediately withdraw a lender’s ability to self-insure mortgages.
HUD has recently suspended origination agreements when default and claim rates have been more than 200 percent higher than the average in HUD’s corresponding field offices during the past two years. The default rates also exceeded the national average.
If a mortgagee is acquired or merged, the performance of either entity will be considered and no waiver will be required, according to the new rule.
“The current regulation may make it easier for a single-state lender to meet the acceptable standard if that lender operates in a state that has a high default rate,” HUD said. “In contrast, a mortgagee would be disadvantaged by having its claim and default rate compared to the national average if the mortgagee operates in states with comparatively high default rates, even if the mortgagee is in full compliance with FHA requirements and otherwise eligible for ‘lender Insurance’ approval.
“HUD believes the proposed methodology will more accurately reflect mortgagee performance by evaluating each mortgagee based on its actual area of operations.”
Monitoring of mortgagee’s performance will be maintained on a continual basis under the new rule versus an annual review.
HUD has already been flexing its muscles — and helping to put companies like Lend America and Taylor Bean and Whitaker Mortgage out of business in the process.
More recently, a regional inspector general for HUD recommended that First Tennessee face a civil penalty of up to $908,648 for not following guidelines on 18 loans where an FHA insurance claim was paid. Among the infractions were a loan with a debt-to-income ratio of 47.16 percent and a mortgage where the borrower invested $2,485 in the property instead of the required minimum $2,640.
“Today’s announcement will create a regulatory framework and codify the legal authority FHA currently has under the National Housing Act,” Friday’s statement said. “For those lenders with special authority to insure mortgage loans on FHA’s behalf, HUD seeks to force indemnification for ‘serious and material’ violations of FHA origination requirements such that the mortgage never should have been endorsed by the mortgagee in the first place just as FHA would not have insured the mortgage on its own.”
HUD expects to cement what constitutes a “reasonable time period” for which lenders will be subject to indemnification — though cases involving fraud or misrepresentation will have no time limits. HUD noted that it has been its long-standing practice to require indemnification for five years after endorsement and this term is reasonable.
FHA Commissioner David H. Stevens explained it is important that HUD’s expectations are very clear.
“We need to clarify which circumstances we’ll require indemnification and the level of loan performance we expect lenders to maintain,” Stevens said in the statement.
