FHA: New Steps to Reduce Risk

FHA Announces Additional Rules to Limit Risk & Shore-up Finances

FHA says new rules to further lender indemnification and limit seller concession will better manage risk without reducing housing market support or access for qualified borrowers.

Avoiding Mortgage Loan SharksThe Federal Housing Administration (FHA) announced a series of new steps to protect and strengthen the FHA’s Mutual Mortgage Insurance Fund, while enabling the agency to continue to give access to homeownership for qualified borrowers.

These new regulations strengthen the process by which FHA requires certain lenders to indemnify the U.S. Department of Housing and Urban Development (HUD) for insurance claims paid on mortgages that are found not to meet the agency’s guidelines. In addition, the last rule requires all lenders with the authority to insure mortgages (Lender Insurance lenders) on HUD’s behalf to meet stricter performance standards to gain and keep up their approval status. 

“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 Acting FHA Commissioner Galante.  “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.  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 as the nation’s housing market and economy continue to recover.”

For those loans insured by Lender Insurance lenders, HUD may need indemnification for ‘serious and material’ violations of FHA origination requirements and for fraud and misrepresentation such that the mortgage never should have been endorsed by the lender.  Additionally, the regulation changes the basis under which lenders qualify for Lender Insurance authority. 

A Lender Insurance mortgagee must prove a two-year seriously delinquent and claim rate at or below 150 percent of the total rate for the states in which the lender does business.  Further, FHA will also check lender performance on an ongoing basis to make sure that participating lenders continue to meet the program’s eligibility standards.  Finally, the regulation establishes a process by which new HUD-approved lenders created through corporate mergers, acquisitions or reorganizations may be considered for Lender Insurance authority.

In a separate Federal Register notice to be published soon, the FHA will propose to cut the maximum allowable seller concession from its current level to one more in line with industry norms.  The current level exposes the FHA to excess risk by creating incentives to inflate appraised value.  The revised proposal reflects public comments received on an earlier proposal published in a Federal Register notice on July, 15, 2010.  The revised proposal calls for a 30 day comment period.  Following an analysis of the public comments received, a final rule will be issued.

Details of the changes announced today are available on the HUD website and will soon be published in the Federal Register as a final rule.

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