We write this as professionals who have had numerous clients in the mortgage broker industry for many years, and as mortgage professionals who are very familiar with the Federal Housing Administration’s (FHA’s) current regulation of the industry. The announcement from the U.S. Department of Housing & Urban Development (HUD) stated that mortgage brokers:
“ … will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees [lenders]; however they will no longer receive independent FHA approval for origination eligibility. These policy changes will require the FHA-approved mortgagee [lender] to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee.”1
Surprisingly, this unexpected policy announcement was buried near the end of HUD’s Sept. 18, 2009 press release whose title, “FHA Announces Credit Policy Changes, Adding Chief Risk Officer,” did not reference this proposed change. Even more surprising was the subtitle of the announcement which began with the statement, “Policy changes will reduce risks …” While some of the proposed changes in the announcement may lead to reduced risks for FHA, this specific proposal would have the opposite effect, and thus, should not be implemented.
I.
FHA regulations seem prudent, given the recent housing and credit crisis. The announcement left unaddressed whether mortgage brokers would be expected to adhere to current FHA requirements, which would be enforced by the lenders with whom the mortgage brokers dealt, or whether there would be no more mortgage broker level requirements. I believe that, given the recent housing and credit crisis, FHA’s existing mortgage broker rules and requirements should remain in effect with or without a shift in enforcement or regulatory responsibility.
II.
The current rules establish high, but attainable, standards for mortgage brokers. Current estimates are that nearly half of the nation’s mortgage brokers are now approved to originate FHA loans, though that percentage has grown drastically over the last two years. Consumers who select a broker approved to originate FHA loans recognize that the broker is held to a higher standard, as mentioned in a recent article in the Des Moines Register.2 In fact, in Congressional testimony by the National Association of Mortgage Brokers (NAMB), the association explicitly states those FHA requirements which the association recommended changing, but not eliminating, provided “a dual layer of protection for both the FHA program and the consumer.”3
III.
Mortgage brokers are independent and separate from lenders, and should continue to be regulated separately. Though mortgage brokers are already governed by agreements with their respective FHA-approved lenders who would remain subject to the FHA, the FHA rules currently applied to both the lenders and mortgage brokers are necessitated by the autonomy of each of these separate, and often distant, players in the current mortgage market. Mortgage brokers are completely separate and independent entities from the lenders with whom they chose to contract. Often, lenders will establish relationships over the phone and Internet and never physically meet the brokers who originate loans on their behalf. This is very common in the industry. To thrust upon lenders, a requirement to adequately assume oversight and responsibility for these heretofore independent brokers as both a regulator and de facto insurer all in one fell swoop, represents too great a risk to both the FHA and the marketplace. The risk to FHA will be that many lenders will not adequately fulfill their role. The risk of fraud and default rates will increase in those cases. Certainly, the contemplation of this seems inconsistent with the current administration’s stated contention that the current financial industry requires more regulation and not less.
In light of the fact that it was many large wholesale lenders, such as Lehman Brothers and Indy Mac, that developed and pushed down through their mortgage broker channels, millions of now infamous sub-prime loans that contributed to the recent credit and housing meltdown, FHA’s proposed abdication of broker oversight seems perplexing.
IV.
Consideration should be given to the thousands of mortgage brokers who have recently attained FHA certification under the current regulations. A significant shift has occurred in the mortgage industry since early 2007, when estimates were that only 18 percent of mortgage brokers were certified to originate FHA-insured mortgages.4 Since that time, thousands of mortgage brokers who previously dealt only with conventional loans, have become certified to originate FHA-insured mortgages. This has greatly expanded the number of outlets from which FHA-insured loans are now offered. In fact, some speculation now exists among industry professionals that, unlike 2007 when the number of outlets for FHA loans was last hotly debated on Capitol Hill, most eligible brokers who deal with middle-income or lower-income borrowers have, by now, worked their way through the FHA’s certification process. This would mean that the majority of those not certified by the FHA are not eligible, whether it be as a result of their not meeting FHA’s net worth requirements, facility requirements, personal credit histories or some other criteria.
For FHA to now remove itself from its role as the approval body for mortgage brokers desiring to originate FHA loans, belatedly thinking that some long gone need is out there to “increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans,” fails to see the seismic shift that had occurred since this issue was last argued on Capital Hill. Removing the FHA’s mortgage broker rules now, without a deeper study of the caliber and quality of the remaining uncertified outlets, is contrary to FHA’s desire to better manage future risk. In addition, abolishing its rules now may also leave a bad taste in the mouths of the honest and hard-working brokers who once thought that one of the few rewards for their integrity through the recent scandals was being able to say they one day could be or had become “FHA certified.”
V.
FHA’s current system provides an independent regulatory body, which provides consistency and dependably. Even during 2007, when numerous mortgage brokers complained about FHA regulations, no one proposed the elimination of its role as regulator of mortgage brokers. At that time, many mortgage brokers yearned for a replacement of the requirement of the annual financial audit with an alternative, such as a bond requirement. Since that time, the ability to obtain bonds had grown and fees for mortgage broker audits has dropped. In addition, the thousands of mortgage brokers who have gone ahead and successfully applied to FHA … its evident that for them and the agency, the process was not as burdensome as some originally thought. The current system, in fact, provides a modicum of consistency and dependability in an industry still facing chaotic changes. With the bankruptcy and exodus of lenders in the market, highlighted by Web sites such as The Mortgage Lender Implodometer at http://ml-implode.com, it seems dangerous to require mortgage brokers to rely on their lenders continued operations. In addition, with many lenders changing standards and establishing “tiered” relationships such as those established last year by Wells Fargo Home Mortgage, the consistency and longevity of broker/lender relationships is much shorter and unstable, especially for small brokers. Some brokers are concerned that if this change were to go into effect and the market were to deteriorate again or market changes were to negatively impact lenders, the newfound control they would have with this proposed change would enable them to arbitrarily wipe out a class or category of mortgage brokers or even the entire industry.
I applaud the agency’s desire to minimize risk, and especially fraud in the industry, but feel this proposal is contrary to that intent and hazardous to the mortgage broker industry. I would suggest instead that the agency:
1. Increase its staffing and training to better handle the increased number of FHA originators and originated loans being seen in the marketplace; and
2. Continue encouraging greater investigation and prosecution of misconduct by mortgage originators involved in fraud. In doing so, it will better ensure that dishonesty is punished and honesty in the industry is rewarded.
Author's note: This article was co-authored by George S. Daugharty, CPA is a Virginia-based Certified Public Accountant.
Tommy A. Duncan, CMT is executive vice president of Quality Mortgage Services LLC. He may be reached by phone at (615) 591-2528, ext. 124. George S. Daugharty, CPA is a Virginia-based Certified Public Accountant, serving middle-market businesses with a focus on FHA-approved mortgage brokers and lenders. He may be reached by phone at (540) 459-9000.
Footnotes
1-HUD Announcement No. 09-177, “FHA Announces Credit Policy Changes, Adding Chief Risk Officer,” Sept. 18, 2009.
2-Des Moines Register, online edition, March 31, 2009, “How to Select a Mortgage Company in Des Moines.”
3-National Association of Mortgage Brokers prepared testimony on “Solvency and Reform Proposals for the Federal Housing Administration” before the Subcommittee on Transportation, Housing and Urban Development and Related Agencies, Senate Committee on Appropriations, March 15, 2007.
4-National Association of Mortgage Brokers prepared testimony on “Modernization of Federal Housing Administration Programs” before the Senate Committee on Banking, Housing and Urban Affairs, July 18, 2007.
