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FHA May Crack Down on Lenders and Servicers

""The Federal Housing Administration's"":https://www.fha.com/ssl/ml/?PPCID=106&CID=grefbrand1&gclid=CJ_TvpaH0KsCFRIq7AodqSD-UA (FHA) reserves have fallen below legal limits, and the agency now holds $4.7 billion against a $1 trillion portfolio. According to reports recently released by ""FBR Capital Markets & Co."":http://www.fbr.com/ and ""HUD's Office of Inspector General"":http://www.hudoig.gov/ (OIG), the FHA may crack down on lenders and servicers and may not be paying out default claims quite as generously as in the past.


""In the past, claim denials were unusual and policies were paid out almost automatically,"" FBR states in a report released Tuesday.

In the report examining the probability of widespread FHA claims denials, FBR states its belief that the FHA may begin to scrutinize claims a little more closely, specifically zeroing in on servicing requirements.

Additionally, last week the HUD OIG released a ""report"":http://www.hudoig.gov/pdf/Internal/2011/ig1170004.pdf advising the FHA to bar corporate officers who have unfulfilled indemnification agreements with FHA from future FHA insurance.

FBR points out a recent case in which the FHA alleged MortgageIT falsely claimed to perform due diligence for several loans. ""[I]t is significant in that it is one of the first large-scale FHA examinations of claims,"" FBR states in its report.

If the FHA does start denying claims, FBR believes servicers will be most vulnerable because of the FHA's strict servicing standards. ""[I]f the agency is looking for a


way to deny a claim, the servicing process is an easy target,"" FBR states.

FBR believes rather than looking at individual loan quality, the FHA is likely to seek out ""procedural problems.""

Servicers stand to lose a combined $13.5 billion if the FHA engages in such actions, according to FBR's analysis.

As for lenders, the FBR believes they will not be the focus of FHA examinations, despite the MortgageIT case, which focused on originations. However, select individuals in the lending industry may find themselves disqualified from receiving FHA insurance.

After noticing in a previous audit that the FHA ""might not have a system in place to track lenders who voluntarily left the FHA program with outstanding indemnification agreements,"" HUD's Office of Inspector General (OIG) began a review and released its findings and recommendation last week.

In a limited review of FHA, the HUD OIG found among participants in the FHA program, 12 corporate officers who previously worked with seven lenders that lost their FHA approval after failing to fulfill their indemnification agreements.

Combined, the seven lenders held 153 loans totaling more than $7.3 million in losses for the FHA.

With the highest number of loans, First Magnus Financial Corporation held 111 indemnification agreements totaling $5.8 million in FHA losses.

After falling into bankruptcy and being dismissed from the FHA program, four former executives of First Magnus Financial formed a new lending office and received FHA approval.

The FHA stated it will seek legal opinion from the Office of General Counsel as to whether it can obtain the authority to bar participation from a corporate officer if he or she ""served as a corporate officer with an FHA-approved mortgage at a time when that FHA-approved mortgagee was determined to have committed a knowing and material violation of FHA requirements.""

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

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