The Federal Housing Administration (FHA) is changing the way it monitors the loan performance of its largest lenders as part of a rule to clarify and codify its indemnification practices.
The changes could jeopardize the status of some originators that participate in FHA's ‘Lenders Insurance' program and force adjustments by others.
The final rule generally expedites FHA's procedures for seeking reimbursement for loan losses from Lenders Insurance (LI) mortgage bankers.
These approved LI lenders exercise FHA's highest direct endorsement authority and currently originate 80% of all government insured single-family loans.
Under the final rule, FHA will begin evaluating LI lenders based on their default and claim rate in the states they operate in. A lender with a ‘cease and desist' order compare ratio above 150% can lose their LI approval. In addition, FHA will monitor lender performance on a quarterly basis, instead of annually.
"A Lender Insurance mortgagee must demonstrate a two-year serious delinquency and claim rate at or below 150% of the aggregate rate for the states in which the lender does business," according to the final rule issued by Department of Housing and Urban Development (HUD).
Previously, FHA monitored a lender's performance at the local FHA field office level or national level. Some are concerned this change to the state level could push a lender's compare ratio over 150%.
"It will be better for some lenders and won't be good for some lenders," said Glenn Corso, managing director at the Community Mortgage Banking Project.
If a lender's compare ratio exceeds 200%, they can lose their approval as a FHA direct endorsement. "That is big a deal," Corso said.
"If you lose your direct endorsement ability," he said, the lender has to send the loan file to a FHA office for approval. This process can lead to closing delays and upset borrowers.
Approved LI and direct endorsement lenders can underwrite and close a loan knowing HUD will insure it. The final rule goes into effect in thirty days.
The indemnification provisions in the rule basically codify FHA's current administration practices. And it clarifies that HUD will seek indemnification for "serious and material" violations of FHA underwriting requirements, as well as in cases involving fraud and misrepresentation.
The new rule does reduce the ability of lenders to forestall indemnification by forcing FHA to take an indemnification case before the HUD Mortgagee Review Board. If HUD determines indemnification is warranted, the LI lender will "not be able to negotiate the settlement," the final rule says.
During the comment period, lenders sought several changes to the indemnification provisions, but agency officials stood their ground. "While it is tough, I don't think it's draconian," said Tom Cronin, managing director of The Collingwood Group in Washington.
It ensures everyone understands the rules, he said, and tells everyone that HUD is going to enforce them. "Taken together, the changes will protect FHA's insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD's underwriting expectations," said FHA acting commissioner Carol Galante said.
Galante also served notice that FHA will issue a final rule soon that curbs seller concessions, such as pre-paid closing costs or association dues.
FHA currently allows seller concessions of up to 6% of the loan amount. The agency issued a proposed rule over a year ago to reduce seller concessions to 3%.
In other FHA news, the serious delinquency rate on the FHA's $1 trillion single-family loan portfolio edged closer to 10% in December as the pace of originations slowed in the fourth quarter.
FHA reported Friday that 9.6% of its 7.4 million insured loans are 90-days or more past due in December, up from 9.3% in the prior month.
FHA servicers reported that 711,082 mortgages are seriously delinquent as of Dec. 31, according to the “FHA Single-Family Outlook” report. “It should be noted that the November through February period is the seasonal high-point for serious delinquencies,” the agency said.
A year ago the FHA serious delinquency rate was 8.8%.
The agency also reported that lenders originated $47.9 billion in mortgages in the fourth quarter, including $16.7 billion in December.
On a quarterly basis, FHA lending is down 37.5% from a year ago.
It appears that seasonal factors and slowing originations are pushing the default rate up.
In addition, most the delinquencies are legacy loans, according to FHA's Neighborhood Watch system that tracks early delinquencies over the most recent two-year period.
NW shows only 47,180 loans originated in the prior two years (2010 and 2011) have defaulted. With 711,080 in total defaulted loans -- that is a 6.7% early default rate.
American Enterprise Institute resident fellow Edward Pinto is warning that FHA's delinquencies are headed north because 25% of FHA loans originated in 2009 though 2011 are very risky.
Pinto has started publishing “FHA Watch” and he is calling on FHA to “stop lending to people who cannot afford to repay loans” and “concentrate on homebuyers who truly need help purchasing their first home.”
FHA consultant Brian Chappelle said delinquency rates on newer originations are steady dropping.
“You have this great performance on recent loans. If you tighten the screws more, we are just going to choke off any demand,” Chappelle said. “The number one problem we have to today is the lack of demand,” he added. Chappelle is a founder of Potomac Partners.
