A Federal Housing Administration program designed to prevent predatory lending is garnering support from the Senate, much to the dismay of lenders who have been barred from originating FHA-insured loans.
The two Democratic senators from Maryland, Paul Sarbanes and Barbara Mikulski, have introduced legislation to give the FHA's Credit Watch Program the ability to continue without being barraged by lawsuits.
Credit Watch is designed to monitor lenders that have foreclosure rates higher than 150% to 300% of the area's average. If the foreclosure rate of the branch is over 300% of the area average, the FHA can bar that lender from originating loans. Lenders then have 30 days to present an appeal to the Department of Housing and Urban Development, who oversees the FHA.
The two senators introduced the legislation on the heels of two Maryland Banks, Capitol Mortgage Co. and Skycorp Inc., which filed suits against HUD for being placed on Credit Watch. The two successfully argued their cases.
While the FHA has always had the authority to use the program, the legislation gives the department the resources to enforce it.
"I want to ensure that the FHA has the necessary resources to keep lenders from offering loans that they know cannot be paid back," said Sarbanes in a press release. "Credit Watch is one effective and efficient way that FHA can stop these unfortunate foreclosures from happening. While we need to address the larger issue of predatory lending in our communities, Credit Watch is an obvious and immediate solution to one part of the problem."
"Credit Watch has been an extremely effective tool for the FHA," said FHA Commissioner William Apgar. "And although it is clear that the department has statutory authority to run the program, we are facing three lawsuits stemming from the 56 proposed lender terminations FHA has issued over the last year. Therefore, I think this legislation will be an important step in removing any doubt as to the FHA's statutory authority to run the Credit Watch program."
Bud Carter, senior director of residential finance of the Mortgage Bankers Association, has not seen the text of the legislation, but said that if "the appropriate safeguards are there for a lender to be able to appeal or offer mitigating factors," the MBA would support the bill. He noted that the MBA has always been a supporter of the Credit Watch program.
One mortgage-backed trader sees the process of combating predatory lending getting too political, however. "Obviously, there's some egregious things [associated with predatory lending], but there's a lot of what is considered predatory lending by some people could just be considered sound practices by others," he said. "So I am very concerned about the prospect of politicizing the whole process."
The Liquidity Problem
Market observers do not see banks placed on Credit Watch soaking up a great deal of supply from the FHA market, as a majority of lenders likely to go on watch are on the fringe.
"Norwest, Countrywide and a few others I think really dominate FHA originations," said a market observer. "If there are underwriting issues on these loans then if delinquencies go down a little bit, you may in fact have slightly lower prepayments. But I would imagine that volumes are going to be so small that it's not going to have a noticeable impact."
FHA supply and liquidity has become the talk of the market recently, with large players such as Norwest and Countrywide selling their FHA-insured mortgages to the Federal Home Loan Banks' Mortgage Partnership Finance program. With the announcement recently of the Federal Housing Finance Board's decision to remove the cap on the MPF - which allows more banks to sell FHA loans to the program - this could dramatically reduce FHA supply and kill liquidity.
"And we're encouraged that the Finance Board moved in the direction a Core Mission Achievement rule that gives the Federal Home Loan Banks the flexibility to properly manage their balance sheets in all business cycles," said John von Seggern, president of the Council of Federal Home Loan Banks.
