FHA tightens rules, penalties for mortgage lenders
The Federal Housing Administration will toughen its standards for approving lenders that insure mortgages on its behalf and force more of them to buyback defaulted loans.
FHA Commissioner Carol Galante said the upcoming rule changes will help the agency protect its Mutual Mortgage Insurance Fund, which, according to some, is in danger of needing a bailout. The fund slipped to a 0.24% capital ratio in the fiscal year 2011, down from 0.5% the year before.
The rule was initially proposed in October 2010 and finalized Friday.
The rule changes apply to lenders authorized to insure mortgages for the FHA without first submitting documents to the agency. Roughly 80% of all FHA-insured mortgages are done this way.
The FHA will make it tougher to get approval for the coveted status. According to the new rule, a lender must hold a serious delinquency rate at or below 150% of the program's average for the two years prior to its application. This rate will apply to all states in which the lender does business.
Also, the final rule forces lenders to indemnify – or reimburse FHA for an insurance claim – if the lender "knew or should have known" of any fraud or misrepresentation involved. Lenders would be on the hook for indemnification if the loan defaults within five years of origination.
Some commentary from the industry asked it to be shorted to a two or three year window, because problems that occur after then are due to job loss or divorce rather than decisions made at origination. FHA wouldn't budge and said adopting the shorter timeframe "would be inconsistent with proper risk management practices."
Others wanted clarification on whether or not the FHA would judge nationwide lenders with others operating within a smaller geographic area when determining approval or renewal of the status. They recommended larger lenders be held to a claim rate up to 150% of the national average, rather than just the states in does business in.
FHA didn't amend the rule based on these comments either.
In a separate proposal, the FHA is changing the maximum allowable amount of seller concessions, or how much the seller contributes to the down payment or closing costs. The FHA said it will be reduced because the current level creates incentives to inflate the appraised value of the home.
Galante said the FHA will "continue to strike a balance" between managing its risk and continuing to provide support to a still struggling housing market.
"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," Galante said.
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