Mortgagee Letter 2010-03 contains information about the procedures that the Federal Housing Administration (FHA) will follow for terminating the underwriting authority of lenders with a high default and claim rate (DCR). Many loan officers are unaware of what a DCR is, let alone and where to find out what their company’s DCR is.
The DCR is the sum of the loans in default and claim divided by the total loans originated within a 24-month period (or what FHA calls a “Performance Period”). The compare ratio (CR) is the lender’s DCR divided by the DCR within a U.S. Department of Housing & Urban Development (HUD) field office jurisdiction.
To understand how the FHA uses the CR, here is a quote from the Code of Federal Regulations 24 CFR 202.3:
“… A mortgagee's default and claim rate within a HUD field office jurisdiction is compared to the overall default and claim rate of the entire HUD field office jurisdiction. Before HUD terminates the underwriting authority, it will consider mitigating issues raised by a mortgagee during its informal conference and in its written response. HUD's evaluation of mortgagees on the basis of HUD field office jurisdiction coincides with the manner in which FHA approves mortgagees to operate. This method of evaluation recognizes that local market conditions and events may contribute to higher defaults and claims.”
To view your company’s DCR and CR, go to the Neighborhood Watch Web site (set up by FHA to make company data public). Click on the “Early Warnings” tab and then on “Single Lender.” Type in your company’s name and click “Submit” to get the data. Any company with a CR of 150 percent or less is considered acceptable. If, however, your company or the lender you sell loans to has a CR higher than 200 percent, be prepared for the possible termination of underwriting authority of FHA loans.
By way of example, take Gold Star Mortgage Financial, a recently named Inc. 500 company out of Ann Arbor, Mich. and led by Chief Executive Officer Daniel Milstein, one of the country’s top originators. Gold Star originated 2,249 FHA loans in the most recent performance period and has a 4.45 percent DCR in a jurisdiction with a 5.03 percent DCR, so Gold Star’s CR is 88 percent (4.45 divided by 5.03). This puts them within the top percentile in the country, anything under 100 percent is outstanding.
Try looking up some companies that are known to do risky FHA loans and check out their CR. I’d suspect that since Mortgagee Letter 2010-03 came out, many companies in fear of losing their Direct Endorsement (DE) are working tirelessly on loss mitigation efforts to get their CR down and to prevent their termination.
A loan officer recently contacted me about moving to a different lender and wanted my opinion. I directed him to the Neighborhood Watch Web site, where we discovered the lender he was considering had a CR in excess of 300 percent! Needless to say, I advised him to look elsewhere.
If you’re the owner of a company and have a low CR, use this as a recruiting tool to instill confidence prospective employees that they’ll be working for a solid company that writes good loans. If you have a high CR, it’s time to dust off your quality control plan, update it and get your staff focused on writing quality loans.
Here are the seven things you need to know about the changes from this Mortgagee Letter:
1.The effective date of this policy is Jan. 21, 2010.
2. This change allows HUD to terminate the underwriting authority of lenders with high DCRs. Previously, HUD only had authority to terminate loan origination approval authority.
3. Every three months, HUD will review the previous 24 months of DCRs on all FHA-insured single family loans and analyze the performance of every mortgagee.
4. HUD will target lenders with a DCR that exceeds 200 percent of the DCR within the geographic area, and also those which exceed the national DCR.
5. HUD will take underserved areas into consideration and compare a mortgagee's performance to the field office's average DCR for similar loans.
6. To lessen the effect this policy will have on lenders with small volume, HUD will establish a minimum DCR and only analyze lenders that exceed this minimum DCR.
7. Mortgagees may appeal within 30 calendar days of the date of receipt of the proposed termination notice.
Since FHA is putting the hammer down, it may have you reeling a bit. But remember, a healthy and solvent secondary market, which includes Ginnie Mae, is vital to your origination practice.
Jeff Mifsud founded Southfield, Mich.-based Mortgage Seminars LLC in 2004, has been an FHA originator for 13 years, is a contributor to LoanToolbox.com and is a former FHA underwriter.