Loan Modification

More FHA Lender Buy-Backs Coming

By Peter G. Miller

We mentioned last week that HUD is establishing a new standard for FHA loans that it insured as a result of, er, lender creativity and not playing by the rules.

There’s more to this. In a new letter, FHA Commissioner outlined additional steps HUD is taking to protect borrowers — and itself.

“HUD,” says Stevens, “seeks to force indemnification for violations of FHA origination requirements that are ‘serious and material’ to the extent that the mortgage never should have been endorsed by the lender in the first place, just as FHA would not have insured the mortgage on its own.”

What lender sins might cause a forced buy-back? Stevens says lenders may be required to indemnify HUD if they failed one of several standards:

1. They didn’t verify and analyze the creditworthiness, income, and/or employment of the borrower.

2. They didn’t verify the source of assets brought by the borrower for payment of the
required down payment and/or closing costs.

3. They didn’t address property deficiencies identified in the appraisal affecting the
health and safety of the occupants or the structural integrity of the property.

4. They didn’t ensure that the property appraisal satisfies FHA appraisal requirements.

5. HUD may seek indemnification irrespective of whether the violation caused
the mortgage default or not.

The Stevens list is good news for borrowers — and also good news for local neighborhoods and communities.

For borrowers the issue is fairly plain: Lenders are going to demand paperwork and then they’re going to check with care the documents they received. I don’t see this as a big deal. Whenever I have gotten a mortgage my lender has always received a package of documents that would satisfy any financial standard. Why? So that everything would be properly documented and explained, a necessity in general but especially when dealing with investment property.

The neighborhoods and communities benefit works like this:

If a property is not affordable the owners will ultimately be forced to sell. If the property appeared to be affordable because the lender fudged the loan application, then the borrowers are nothing less than victims of a financial ambush, one that will show up months or years down the road when the property must be sold or foreclosed.

Those local foreclosures impact neighborhood and community home values, including yours and mine. And by “impact” I mean values get reduced.

Too often we forget that the lowering of home values today is a by-product of lousy lending practices if not outright fraud three, four and five years ago. The FHA, to its credit, stuck to its standards.

The FHA ought to set the benchmark for straight dealing in the mortgage world. An FHA loan ought to mean someone got a mortgage because of their financial merit and because FHA guidelines were followed. A few loan buy-backs ought to make the point.

Full post as published by FHA Mortgage Guide on October 27, 2010 (boomark / email).