The Mortgage Bankers Association is concerned a proposal from the Department of Housing and Urban Development to force indemnification could penalize responsible lenders by requiring them to indemnify FHA for loans regardless of cause or materiality.
Earlier this year, HUD proposed new regulations to strengthen its authority and 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. According to the MBA, many of the proposed policy changes are extremely subjective and provide FHA with the authority to apply rules with the most rigid interpretation, at the Administration’s discretion.
“Making the rules overly strict and incontestable only serves to heighten all lenders’ reservations in originating FHA loans through the LI process. For example, requiring a “continual” review of lenders without recognition of market fluctuations, remediation time, or the definition about the frequency of “continual” is holding lenders to an unrealistic standard that even the most conscientious company would have difficulty attaining.”
Under the proposal, a mortgagee is required to indemnify HUD for an insurance claim paid within five years of the endorsement if the mortgagee knew or should have known of a serious and material violation irrespective of whether the violation caused the default.
The MBA argues that five years is too long a time period from the date of origination and recommends an alternative standard of three years. After five years, problems that occur with the loan typically are not due to underwriting or other origination issues, but are due to life changing events beyond the lender’s control, such as loss of employment, divorce, or death says the MBA.
MBA is concerned that FHA has the latitude to become overly technical and apply unrealistic standards to lenders, in an effort to protect its own financial security.