As the Mortgage Asset Research Institute (MARI®) reported earlier this year, mortgage fraud is at an all time high with 61% of applications containing fraud, with the cost to the industry to exceed $75 billion dollars in 2010. The Federal Housing Administration is looking for ways to mitigate fraud, increase consumers commitment to homeownership, increase compliance from approved lenders, and budget the agency to meet legislative reserve requirements (currently well below the 2% threshold).
For the first time in FHA history, it is adding a Chief Risk Officer position to assist the agency with increasing responsible lending and risk management. FHA is proposing some changes to be effective January 1, while other changes are still under review for the near future.
Changes in borrower requirements may limit the homeowner’s ability to qualify or have sufficient funds to close the transaction. FHA wants a bigger commitment from the borrower to reduce the risk of abandonment. Changes that will affect the home buyer…
May need up to 5% down payment increasing their investment in the property
May require higher credit scores to participate in the program anticipated to reduce defaults
May reduce the seller contribution down to 3%
FHA wants to see the homebuyer invest more in the purchase of their home to keep them from bailing on their homes. With more at stake the homeowner may be better at budgeting what they can afford, and be more responsible homeowners.
Possible changes for lenders may be more restrictive and reduce the number of lenders that can afford to participate in the FHA loan program. Lender changes…
Audited financial statements annually for supervised mortgagees to reduce risk
Revise procedures for streamline refinance transactions requiring seasoning, payment history, income verification, and demonstration of net tangible benefit to the borrower; provide for collection of credit score information when available; and cap maximum LTV at 125%. These revisions ensure the borrower’s capacity to repay the new mortgage, and prohibit the dangerous practice of loan churning.
Require independence and geographic competence of appraisers. Mortgage brokers and commission based lender staff are prohibited from ordering appraisals.
New guidelines that allow a second appraisal be ordered under certain circumstances. Restates the requirement the first lender must transfer the appraisal to the second lender at the request of the borrower when borrower switches lenders.
Pending changes – Lenders must meet eligibility criteria and assume responsibility and liability for the FHA insured loans they close. Mortgagees will have to assume liability for all the loans they originate and/or underwrite. Loan Correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility. This may remove the requirement for mortgage brokers to undergo HUD audits, and increase the added liability their correspondent lender will be accepting when taking in their closed loans.
HUD is requesting to change the current $250,000 capital requirement. Initially the increase would be approximately $1 million that would have to be in place within one year of the enactment. The requirement may go as high as $2.5 million for banks. This would better ensure the lender would be able to repay the agency for losses if they were involved in fraud or default.
The agency recently suspended or withdrawn 277 lenders from the FHA program, and will continue to suspend businesses with abusive practices of closing too risky or fraudulent loans. FHA is building on the lessons learned from the current industry problem. Lenders must have ‘skin in the game’ with a long-term interest in the performance of the loans they originate, stated HUD Commissioner Stevens.
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