Loan Modification

Is FHA Recovering its Losses on Bad Mortgages?

By Karen Lawson

It’s time for FHA to identify and hold its approved lenders accountable for not following FHA guidelines when originating new FHA loans. In a recent blog for the Wall Street Journal, Peter Eavis notes that both Fannie Mae and Freddie Mac require mortgage lenders to repurchase mortgages failing to conform to their underwriting and loan servicing guidelines. Holding FHA approved lenders accountable by requiring lenders to reimburse FHA for losses on bad loans provides both preventative and remedial enforcement of FHA guidelines and lending requirements.

As Mr. Eavis points out, it’s unclear whether FHA is pursuing reimbursement for losses caused by bad loans. With its reserves falling, the lack of reporting and/or enforcement by FHA could lead to  taxpayers paying for losses on loans that should never have been made by FHA lenders or insured by FHA.

Bad FHA MortgageLoans: If You Make Them, You Pay for Them

This paraphrasing of a popular retail slogan sums up the idea behind requiring mortgage lender to reimburse FHA for its losses on poorly originated loans. FHA currently insures about one third of residential mortgages, up from single digit percentages a few years ago. FHA reimurses mortgage lenders for losses associated with foreclosure and loss mitigation effort; th agency’s increasing market share renders it increasingly vulnerable to losses arising from mortgage defaults.

Holding FHA Lenders Accountable: How Requiring Reimbursement Could Help

By requiring its mortgage lendersto reimburse FHA for claims paid on delinquent and foreclosed mortgges, FHA could make progress toward reinstating its reserves to  mandated levels. This would help with soothing the concerns of legislators and taxpayers. Enforcing reimbursement requirements would encourage mortgage lenders to follow FHA guidelines.

Establishing and enforcing a comprehensive reimbursement program would assist with reducing FHA’s inventory of foreclosed homes. Mortgage lenders cited for improper activity associated with FHA insured loans could be required to accept title to foreclosed properties in addition to reimbursing FHA for any claims paid.

Increased review of FHa approved lenders: By identifying mortgage loans requiring reimbursement to FHA, problem areas can be identified. Problems include lenders habitually ignoring FHA guidelines and mortgage fraud schemes resulting in mortgage defaults and foreclosure.

Enforcing FHA Mortgage Reimbursement: Who Would Pay for It?

The foremost concern with government programs is a potential burden on taxpayers. Mortgage lenders would pay for reimbursing FHA for losses on bad mortgage loans, but to put a comprehensive policy and program in place, FHA would have to hire and train employees familiar with mortgage lending, servicing and auditing mortgage loan underwriting and servicing records.

Concerns over adding another complex level of bureaucracy to the mortgge lending process are legitimate. Buying or refinancing a home is already complicated, and with increased FHA recourse hanging over their heads, it’s a good bet that mortgage lenders would find ways to pass on the potential costs to consumers.

Full post as published by FHA Mortgage Guide on June 03, 2010 (boomark / email).