FHA Announces Measures to Better Protect Itself From Possible Bailout

Acting Federal Housing Administration (FHA) Commissioner Carol J. Galante has announced the latest in a series of steps to protect and strengthen the FHA’s Mutual Mortgage Insurance Fund. The newly-announced regulations seek to strengthen the process by which the FHA requires certain lenders to indemnify the U.S. Department of Housing & Urban Development (HUD) for insurance claims paid on mortgages that are found not to meet the agency's guidelines. In addition, the final rule requires all lenders with the authority to insure mortgages on HUD’s behalf ("Lender Insurance" mortgagee) to meet stricter performance standards to gain and maintain their approval status. More than 80 percent of all FHA forward mortgage loans are insured by Lender Insurance lenders. “Taken together, the changes announced today will protect FHA’s insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD’s underwriting expectations” said Acting Commissioner Galante. “FHA must continue to strike a balance between managing risks to its insurance funds and ensuring that FHA products are offered as widely as possible to qualified borrowers. We hope that the added clarity and certainty provided through these rules will enable lenders to extend financing opportunities to larger numbers of American families as the nation’s housing market and economy continue to recover.” For those loans insured by Lender Insurance lenders, HUD may require indemnification for what they deem "serious and material" violations of FHA origination requirements and for fraud and misrepresentation such that the mortgage never should have been endorsed by the lender. Additionally, the regulation changes the basis under which lenders qualify for Lender Insurance authority. A Lender Insurance mortgagee must demonstrate a two-year seriously delinquent and claim rate at or below 150 percent of the aggregate rate for the states in which the lender does business. Further, FHA will also monitor lender performance on an ongoing basis to ensure that participating lenders continue to meet the program’s eligibility standards. Finally, the regulation establishes a process by which new HUD-approved lenders created through corporate mergers, acquisitions or reorganizations may be considered for Lender Insurance authority. In a separate Federal Register notice to be published soon, the FHA will propose to reduce the maximum allowable seller concession from its current level to one more in line with industry norms. The current level exposes the FHA to excess risk by creating incentives to inflate the appraised value. The revised proposal reflects public comments received on an earlier proposal published in a Federal Register notice on July, 15, 2010. The revised proposal calls for a 30 day comment period. Following an analysis of the public comments received, a final rule will be issued.