FHA Tightens Lending Insurance Requirements to Limit Risk

On Friday, the Federal Housing Administration (FHA) restated intentions originally announced in 2010 to enact more stringent performance requirements for Department of Housing and Urban Development-approved lenders by increasing lender indemnification, with an eye toward limiting risk and strengthening finances for its Mutual Mortgage Insurance (MMI) Fund.

“These new regulations strengthen the process by which FHA requires certain lenders to indemnify the U.S. Department of Housing and Urban Development (HUD) for insurance claims paid on mortgages that are found not to meet the agency’s guidelines,” FHA said in its announcement.

More than 80% of all FHA “forward” mortgage loans are insured by Lender Insurance lenders, and now they’ll have to do more to get—and keep—their approval status.

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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 Carol Galante in a statement.  “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.”

Back in November, the agency’s annual MMI fund report revealed that while its capital balance remained in “positive territory,” the capital reserve ratio, at less than 0.3%, was well below the Congressionally-mandated level of at least 2%.

Galante downplayed the possibility that the FHA may need a bailout, saying that there was “no current evidence” that sustained declines in housing prices would continue throughout 2012, creating a “situation in which the MMI Fund would require support from the Treasury.”

However, in December, HUD Secretary Shaun Donovan said that the FHA was looking into some potential policy options that would support the Fund, including insurance premium increases.

Now, the FHA is taking some additional steps to limit risk and strengthen finances, and HUD may require indemnification for ‘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.”

The new regulation also changes the basis under which lenders qualify for Lender Insurance authority, and will require mortgagees to “demonstrate a two-year seriously delinquent and claim rate at or below 150% of the aggregate rate for the states in which the lender does business.”

Lenders will be monitored on an ongoing basis so the FHA can make sure that participating lenders are meeting the program’s eligibility standards, and the FHA will also propose to reduce the maximum allowable seller concession from its current level to one that’s more “in line with industry norms.”

Currently, the allowable seller concession “exposes the FHA to excess risk by creating incentives to inflate appraised value,” and the reduction reflects public comments received on an earlier proposal published in a Federal Register notice on July 15, 2010.

HUD proposed new regulations in October 2010 to strengthen its authority to force lenders to reimburse the FHA for insurance claims paid on mortgages that don’t meet the agency’s guidelines.

Written by Alyssa Gerace

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