HUD Proposes New Rule to Change Broker Approval Process

In a new HUD rule proposed today, HUD seeks to change the process to become an FHA approved lender, among other things. Whereas currently the FHA approves both mortgagees and correspondent lenders, the new rule would streamline the approval process so that the FHA will only approve mortgagees. Correspondent lenders will then need to be “sponsored” by an FHA-approved mortgagee, with the sponsoring lender assuming responsibility for the loan correspondent. This means that the sponsoring lender would be responsible for insuring that the FHA loans from the loan correspondent meet FHA standards, correspond with the HFSH Act’s requirements and meet the requirements for integrity and financial soundness. If the loan correspondent is found to be out of compliance, the FHA-approved mortgagee would be liable for sanctions.

The new HUD rule also increases the net worth requirements for FHA-approved mortgagees from $250,000 to $2.5 million over three years. The changes will also apply to those applying for FHA mortgagee approval.

The FHA is soliciting public comments on the proposed rules via mail and email through December 30, 2009, a period of 30 days as opposed to the usual 60 days. The proposed changes are unsurprising, as the FHA has seen an unprecedented number of lenders applying for approval in the last two years, and there is already a huge backlog of lenders waiting to be approved. The proposed changes will hopefully help reduce FHA’s workload while allowing more lenders to originate FHA loans (though likely as correspondent lenders instead of full-fledged mortgagees).

The proposed rule can be found in its entirety here.

FHA Mortgage Insurance Changing Real Estate Landscape

An article in the New York Times on Thursday exposed how the low down payments required for FHA insured mortgages were changing the mortgage and real estate markets-- and not necessarily for the better. Up until the loan limits were raised in the Economic Stimulus Act of 2008, the FHA mortgage insurance program tended to focus on loans in low cost states, primarily in the middle of the country. Texas and Michigan were prime candidates. Now that the loan limits have been increased to $729,750-- a limit extended through April 2010 along with the HECM limits-- FHA insured mortgages are proliferating along the coasts as well. A statistic shown at the NRMLA Reverse Mortgage Conference yesterday gave the FHA a 30% market share of the mortgage market nationwide.

But there is a problem: the Mortgage Bankers Association (MBA) announced yesterday that nearly 1 in 10 homeowners with mortgage payments are delinquent. That's a record high. More than 1 in 6 FHA borrowers are delinquent, a higher percentage than the national figure. As such, the continued proliferation of FHA insured mortgages with extremely low down payments paves the way for further problems for an agency that already has reserve levels below the federally required minimums.

FHA mortgage insurance can help a lot of buyers find their way into new homes, but the difference between a 20% down payment (the amount generally required by private lenders) and a 3.5% down payment (the amount generally required for an FHA insured mortgage) is a significant one. With such a low down payment, it is far more likely that buyers will wind up in homes they cannot afford.

The reverse mortgage industry should keep an eye on this phenomenon as well. Since forward mortgages and reverse mortgages have been considered in much of the same legislation, any changes to loan limits or mortgage insurance (MIP) is likely to effect reverse mortgages as well.

HUD Grants Cushion for New Regulatory RESPA Requirements

The US Department of Housing and Urban Development (HUD) announced today that it would instruct the Mortgagee Review Board (MRB) in enforcing the new Real Estate Settlement and Procedures Act (RESPA) requirements during the first four months of 2010. The instruction means that as long as FHA-approved lenders are acting in good faith in the spirit of the new RESPA guidelines, they will hopefully be immune from actions against them. HUD is also asking federal and relevant state agencies to give lenders the same 120-day grace period.

A lender will be considered to be in good faith based upon whether the lender is using the new RESPA guidelines and other FHA materials for guidance and whether they have invested in and committed to the training, technology, and quality assurance necessary to be in compliance.

Given the burden the new RESPA guidelines will place on lenders, it is good of HUD to allow more leniency in punishing lenders for being out of compliance-- at least in the early stages of the new regulations. Changes include the use of a new standardized Good Faith Estimate (GFE) with specific disclosures as to the key loan terms and closing costs. The changes to RESPA go into effect on January 1, 2010. They apply to reverse mortgage lenders as well as traditional mortgage lenders.

FHA Reserves Low

While the FHA is trying to avoid a government bailout, its reserves have fallen to a dangerously low level. By the end of the 2009 Fiscal Year on September 30, the FHA only had $3.6 billion in reserves, compared with $685 billion in outstanding insured loans. This brings their ratio to .53%, far below the government mandated 2%. Still, the FHA insists that only in their worst case scenario, which has housing prices in the 10 largest cities falling another 28% below their current level and the unemployment rate rising to 12.5% from the current 10.2%, would they need a taxpayer bailout.

Nonetheless, it appears that the FHA is in trouble. 17% of FHA borrowers are delinquent on their mortgages, compared with 13% on all the mortgages issued, according to the Mortgage Bankers Association (MBA). As a result, it's not surprising that the FHA is taking significant losses. Although the FHA insists that their borrowers have higher credit scores than before, the FHA is insuring nearly 25% of all mortgages and almost 50% of those to first-time homebuyers. Given how volatile the economy has been, it should come as no shock that many borrowers continue to be at risk of default and foreclosure if they lose their jobs to the poor economy. First-time homebuyers may be more likely than experienced homeowners to overestimate their financial readiness to own a home.

Some of the proposed solutions include raising the mortgage insurance premium (MIP) and increasing the down payment requirement on FHA loans to 5% from its current 3.5% level. Rep. Scott Garrett (R-NJ) was quoted by the NY Times as saying, "The administration has to stand up and say, "This is what's best for the taxpayer." It is clear that asking taxpayers to help with the bailout is a last resort, and one that is trying to be avoided.