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FHA Raises Mortgage Lender Capital, Liability Requirements

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The Federal Housing Administration (FHA) is rolling out new regulations designed to manage counterparty risks to the insurance funds that protect approved lenders against mortgage default-related losses. The final rule, to be published in the next few days, will require all new lender applicants for FHA programs to possess a minimum net worth of $1m, four times the $250,000 required since 1993. FHA said in a statement today the final rule will also strengthen lender approval criteria, and make lenders liable for the oversight of mortgage brokers. "These changes support quality mortgage lenders while excluding organizations that are ill-equipped to handle the risk associated with market variations," said FHA commissioner David Stevens. "That is particularly important now when a robust, competitive mortgage finance market is a crucial element in rebuilding the American economy. Lenders bear the overall risk of FHA-endorsed loans, therefore it makes sense for them to approve their counterparties and have sufficient capital to operate." Late last year, Stevens announced a number of credit policy changes, as well as the program's intent to roll out new regulations to strengthen the FHA's risk management. FHA said it considered solicited comments since then, while developing the final rule unveiled today. The rule will give current FHA-approved lenders a one-year time period to become compliant with the new minimum net worth requirement. Small business lenders will have the year to possess a minimum net worth of $500,000. Three years after the enactment of the rule, FHA said approved lenders and applicants to FHA single-family programs will be required to have a net worth of $1m plus 1% of total loan volume in excess of $25m. These net worth requirements will also apply to approved lenders and applicants to the FHA multifamily programs after three years. Additionally, multifamily lenders that do not perform mortgage servicing at that time will be required to have an additional 0.5% of total loan volume in excess of $25m. The final changes within the new rule will keep mortgage brokers from receiving independent FHA eligibility approval, although they will still be able to originate FHA-insured loans through their relationships with approved lenders. FHA said this could potentially increase the number of mortgage brokers eligible to originate FHA-insured loans while making FHA-approved lenders more responsible for effective oversight of brokers. Mortgage brokers or other third-party originators already approved by FHA will be authorized to continue to originate FHA-insured loans through the end of the calendar year without sponsorship of an FHA-approved lender. But that origination authority will end on Jan. 1, 2011, FHA said. Write to Diana Golobay.

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