FHA Steps Up Lender Requirements to Limit Default Risk

The Federal Housing Administration (FHA) on Friday announced new measures to strengthen standards for the lenders it works with – measures the agency says will help it better manage the risk that comes with insuring mortgages against default.

The new regulations institute tighter requirements for lenders authorized to insure mortgages on the agency’s behalf under the Lender Insurance mortgagee program. FHA says these institutions will be required to meet stricter performance standards to obtain and maintain their approval status.
More than 80 percent of all FHA forward mortgages are insured through lenders participating in the Lender Insurance program. FHA’s second mortgagee program – the Direct Endorsement program – requires the agency’s approval for endorsement.
In order to be eligible to participate in the FHA single-family programs as a
Lender Insurance mortgagee, a lender must be an unconditionally approved Direct
Endorsement mortgagee that is high performing.
Under the new rule, a Lender Insurance mortgagee must demonstrate a two-year seriously delinquent and claim rate at or below 150 percent of the aggregate rate for the states in which the lender does business.
HUD and FHA will review Lender Insurance mortgagee performance on an ongoing basis to ensure participating lenders continue to meet the program’s eligibility standards.
The new rule also establishes a process by which new HUD-approved lenders created through corporate mergers, acquisitions, or reorganizations may be considered for Lender Insurance authority.
In addition, FHA has shored up its processes for requiring lenders to cover potential losses from insurance claims paid on mortgages that involve fraud or that are found not to meet the agency’s underwriting guidelines, which could force lenders to buy back more defaulted loans.
For those loans insured by Lender Insurance lenders, HUD may require indemnification for “serious and material” violations of FHA origination requirements and for fraud and misrepresentation.
In a separate notice to be published soon, FHA plans to propose to reduce the maximum amount allowed for seller concessions, in which the seller contributes a share of the purchase price toward the buyer’s closing costs.
FHA says it will bring the maximum allowable amount to a level more in line with industry norms. The current level exposes FHA to excess risk by creating incentives to inflate appraised value, the agency explained in a press statement.
FHA says these measures will help to protect and strengthen its Mutual Mortgage Insurance Fund, which has fallen below the level mandated by Congress, while enabling the agency to continue to fulfill its mission of providing qualified borrowers with access to homeownership.
“Taken together, the changes announced today will protect FHA’s insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD’s underwriting expectations,” said Carol J. Galante, FHA’s acting commissioner.
“FHA must continue to strike a balance between managing risks to its insurance funds and ensuring that FHA products are offered as widely as possible to qualified borrowers,” Galante continued. “We hope that the added clarity and certainty provided through these rules will enable lenders to extend financing opportunities to larger numbers of American families.”