HUD Implements Rule to Strengthen FHA Risk Management and Eliminate Correspondents

The US Department of Housing and Urban Development issued Mortgagee Letter 2010-20 to implement a final rule designed to strengthen Federal Housing Administration’s (FHA) risk management and better manage counterparty risks to its insurance funds.

The final rule increases net worth requirements for mortgagees to least $1,000,000 as of May 20, 2010, and requires no less than 20 percent must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

The changes also eliminate the approval of loan correspondents or reverse mortgage brokers and puts the responsibility of approving third party originators on the shoulders of FHA approved mortgagees. HUD said it will hold approved mortgagees responsible for compliance with FHA requirements in all aspects of an FHA loan transaction, whether performed by the approved mortgagee or by its sponsored third party originator.

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“HUD expects that FHA-approved mortgagees will pursue sponsoring relationships with responsible originators, and that approved mortgagees will diligently monitor and evaluate the activities and performance of those they sponsor,” according to the ML.

Additionally, an approved mortgagee may permit a sponsored third party originator to originate FHA’s reverse mortgage program (HECMs), provided that the sponsored third party originator adheres to all other HECM origination requirements.

The ML letter also addresses changes made to FHA’s requirements governing Principal-Authorized Agent relationships.  According to HUD, these relationships can now only be entered into by two FHA-approved mortgagees, both of which possess unconditional Direct Endorsement approval. For forward mortgages, the principal can have either unconditional DE or unconditional HECM approval, but the authorized agent must have unconditional DE approval said HUD.

For HECM reverse mortgages, the principal can have either unconditional DE or unconditional HECM approval, however, the authorized agent must have unconditional HECM approval.

According to the ML, the principal in these relationships must originate the loan and the authorized agent must underwrite the loan, but the loan may close in either parties name.  The relationship, and the respective roles of the parties involved, must be documented accurately and accordingly in FHA Connection.

HUD said additional time is needed to support such documentation in FHA connection and due to impending system changes necessary to support and validate principal-authorized agent transactions, FHA is issuing a regulatory waiver that will delay implementation of this provision until January 1, 2011.

Mortgagee Letter 2010-20

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