Loan Modification

HUD To FHA Mortgage Lenders ? Get It Right Or Pay Up

By Peter G. Miller

If you’re in the mortgage insurance business — which is actually what the FHA does — you want to make very certain that you are not hit with excess claims. Now HUD is telling lenders that if they don’t get their FHA paperwork right they’ll have to pay big money to clean up the mess.

None of this is especially new or different. The usual deal with home private-sector loans is that originators — the folks who sign you up for a nifty new mortgage — must actually buy back the loan if the borrower fails within 120 days or at any time if the origination involved fraud.

Now HUD is setting out new standards for FHA mortgage lenders, standards that should bother no one if they play by the rules.

“It’s important that our expectations are crystal clear,” said FHA Commissioner David H. Stevens. “We need to clarify which circumstances we’ll require indemnification and the level of loan performance we expect lenders to maintain.”

Specifically, says HUD, “lenders may be required to indemnify HUD if they failed to: (1) verify and analyze the creditworthiness, income, and/or employment of the borrower; (2) verify the source of assets brought by the borrower for payment of the required downpayment and/or closing costs; (3) address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property; or (4) ensure that the property appraisal satisfies FHA appraisal requirements. HUD may seek indemnification irrespective of whether the violation caused the mortgage default.”

Five Years

HUD says it “will seek indemnification in cases of fraud or misrepresentation at any time, the Department intends to codify a ‘reasonable time period’ for requiring indemnification in cases where the mortgagee failed to meet FHA requirements. For those cases not involving fraud or misrepresentation, it has been HUD’s long-standing practice of requiring indemnification “within five years from the date of mortgage insurance endorsement.”

The HUD standard is very different — and better — when compared with what has been required in the private sector.

For instance, later this month Michael W. Hudson will release his book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis. Hudson, a former reporter with the Wall Street Journal, explains that some lenders arranged for borrowers to get a “free” first payment by funding it themselves. The advance money will be recovered from the insanely-high fees paid by borrowers.

Not only did the “free” first payment help rope borrowers into lousy loans, it also helped with another problem — it made the loans appear to be current. If a loan failed after a few months then the originator still got to keep its fees and the investor was stuck with a bad mortgage, unless it could show fraud.

Get a copy of Mr. Hudson’s book — it’s available October 26th. The Monster is by far the most readable explanation of the mortgage meltdown, something everyone who has faced declining home values should read.

Full post as published by FHA Mortgage Guide on October 18, 2010 (boomark / email).