Along with rising claims filed on mortgages insured by the Federal Housing Administration (FHA), the rate of denial on these claims might soon increase, according to commentary today by independent rating agency DBRS. The FHA insures approved mortgage lenders against default-related losses on qualifying loans. If the US Department of Housing and Urban Development (HUD) finds that a defaulted mortgage violated FHA requirements at the time of origination, it can deny payment of claims to the lender. As the volume of FHA claims filed increases, “HUD may increase their scrutiny of claims resulting in higher denial rates than what has been observed in the past,” DBRS said in e-mailed commentary. HUD can fully deny or curtail FHA claims for different reasons that include missing insurance certificates, excessive damage to properties, title issues, any deviation in practice by the originator or servicer from the program guidelines, late due diligence, late conveyance or late title package, DBRS said. DBRS said that loss severities for the denied loans are assumed to be similar to that of subprime mortgages with comparable loan characteristics. DBRS is not the only ratings firm to sound the alarm on FHA claims filed at HUD. Credit-rating agency Moody’s Investors Service also noted the risk of higher claims denials in recent provisional ratings of a senior note issued by GMACM Mortgage Loan Trust Series 2010-1, a new residential mortgage-backed deal. Moody’s noted uncertainty remains regarding the insurance claims denial rate of FHA loans as FHA delinquency rates continue to rise. “While the level of claim denials by HUD following default has historically been low, the FHA has experienced an increase in losses on its portfolio over the past several years as its volume of insured loans has grown significantly,” Moody’s said in a statement. The House of Representatives in June passed House Resolution (HR) 5074, the FHA Reform Act, which establishes a handful of new regulations and authorities designed to strengthen the FHA’s capital base and crack down on FHA lenders. For example, the bill grants FHA the authority to terminate a lender’s approval on a national basis due to the performance of regional branches. Write to Diana Golobay.

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