HUD is recommending new regulations which would strengthen its authority to force lenders to indemnify or reimburse the ""Federal Housing Administration"":http://www.fha.gov (FHA) for insurance claims paid on mortgages that don't meet the agency's underwriting guidelines.
[IMAGE] HUD says ""its proposed rule"":http://portal.hud.gov/portal/page/portal/HUD/documents/HUD_LI_Rule.pdf would also require all new and existing lenders with the ability to insure mortgages on HUD's behalf to meet stricter performance standards to gain and maintain their approval status.
Last January, FHA announced ""a series of policy changes"":http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-016 to address risk and strengthen the financial position of its insurance fund, which pays out to lenders in the event the mortgage defaults. In line with this effort, HUD says the new rule will create a regulatory framework and codify the legal authority FHA currently has to hold lenders responsible in instances of fraud, misrepresentation, or noncompliance with the agency's loan origination standards.
""It's important that our expectations are crystal clear,"" said FHA Commissioner David H. Stevens. ""We need to clarify which circumstances we'll require indemnification and the level of loan performance we expect lenders to maintain.""
For those lenders with special authority to insure mortgage loans on FHA's behalf, HUD seeks to force indemnification for ""serious and material"" violations of FHA origination requirements.[COLUMN_BREAK]
Specifically, these lenders may be required to repay FHA insurance claims if they failed to: (1) verify and analyze the creditworthiness, income, or employment of the borrower; (2) verify the source of assets brought by the borrower for down payment and closing costs; (3) address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property; or (4) ensure that the property appraisal satisfies FHA appraisal requirements.
HUD says it may seek indemnification on the grounds of such violations, irrespective of whether the breach caused the mortgage to default.
For cases not involving fraud or misrepresentation, but centering on the lender's failure to meet FHA's underwriting guidelines, HUD can demand indemnification up to five years from the date of mortgage insurance endorsement. The agency says it believes five years is a reasonable ""seasoning"" period for a mortgage loan to either perform or go into default and for the department to ascertain whether origination errors were made.
The proposed rule will also require lenders to ""continually maintain an acceptable claim and default rate."" HUD is recommending that new direct endorsement lenders be expected to demonstrate a default and claim rate at or below 150 percent of the default/claim average for the state or states where the lender does business.
Currently, HUD requires multi-state lenders to measure up to 150 percent or below the national default/ claim average for all insured mortgages. The new rule takes local market conditions into consideration if a lender operates in a state that has a high default rate.
HUD says FHA will continually monitor lender performance rather than conduct annual reviews. FHA, at its own discretion, without any judicial or administrative action necessary, will have the authority to immediately withdraw a lender's ability to insure mortgage loans.