The U.S. Department of Housing & Urban Development (HUD) has proposed new regulations to strengthen its authority to force certain lenders to indemnify or reimburse the Federal Housing Administration (FHA) for insurance claims paid on mortgages that are found not to meet the agency’s guidelines. In addition, HUD’s proposed rule would require all new and existing lenders with the ability to insure mortgages on HUD’s behalf (Lender Insurance mortgagee) to meet stricter performance standards to gain and maintain their approval status.
Last January, FHA announced a series of policy changes to address risk and strengthen the financial position of its insurance fund. This announcement will create a regulatory framework and codify the legal authority FHA currently has under the National Housing Act. To read the full text of FHA’s proposed rule, click here.
“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 such that the mortgage never should have been endorsed by the mortgagee in the first place just as FHA would not have insured the mortgage on its own.
Specifically, these lenders may be required to indemnify HUD if they failed to:
(1) Verify and analyze the creditworthiness, income, and/or employment of the borrower;
(2) Verify the source of assets brought by the borrower for payment of the required downpayment and/or 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 may seek indemnification irrespective of whether the violation caused the mortgage default.
While HUD will seek indemnification in cases of fraud or misrepresentation at any time, the Department intends to codify a ‘reasonable time period’ for requiring indemnification in cases where the mortgagee failed to meet FHA requirements. For those cases not involving fraud or misrepresentation, it has been HUD’s long-standing practice of requiring indemnification “within five years from the date of mortgage insurance endorsement.”
The date of endorsement is a fixed date, and therefore has the benefit of being known to both HUD and the lenders with the authority to self insure mortgages. HUD believes five years is a reasonable “seasoning” period for a particular mortgage loan to either perform or go into default and for the Department to ascertain whether origination errors were made. In addition, this five-year period is not considered a burden to lenders who might otherwise face the possibility of indemnifying insurance claims made on long-ago endorsed mortgage loans.
The proposed rule will also require those mortgagees with delegated lender insurance authority to continually maintain an acceptable claim and default rate, both to gain this special lender status as well as to preserve it. HUD proposes that all new unconditional direct endorsement lenders who have the authority to self-insure mortgages must demonstrate a default and claim rate at or below 150 percent for the previous two years. This standard would apply to the state/states where the lender does business, rather than a national default/claim average.
The present regulation defines an acceptable claim and default as at or below 150 percent of either:
(1) The national average rate for all insured mortgages; or
(2) If the mortgagee operates in a single state, the average rate for insured mortgages in the state.
The current regulation may make it easier for a single-state lender to meet the acceptable standard if that lender operates in a state that has a high default rate. In contrast, a mortgagee would be disadvantaged by having its claim and default rate compared to the national average if the mortgagee operates in states with comparatively high default rates, even if the mortgagee is in full compliance with FHA requirements and otherwise eligible for “Lender Insurance” approval. HUD believes the proposed methodology will more accurately reflect mortgagee performance by evaluating each mortgagee based on its actual area of operations. FHA will continually monitor lender performance rather than conduct an annual review of each “Lender Insurance” mortgagee.
Finally, the FHA will consider the two-year default and claim performance of either entity in the case of acquisition or merger without requiring these entities to seek a waiver. FHA, at its own discretion (without any judicial or administrative action) also clarifies that it has the authority to immediately withdraw a lender’s ability to self-insure mortgage loans.
For more information, visit www.hud.gov.