Loan Modification

FHA starts new year by suspending, fining non-compliant lenders

By Karen Lawson

FHA  is grabbing the attention of mortgage lenders with its actions to rein in non-compliant lenders. Companies failing to comply with FHA guidelines, and therefore increasing FHA risk potential for losses associated with defaulted loans, are getting a wake-up call. FHA Commissioner David H. Stevens announced these actions as FHA continues attempts to improve risk management  and recoup losses associated with faulty lending practices coinciding with the mortgage meltdown a few years ago. Sanctions against FHA approved lenders include:

• Civil penalties ranging from $1000 to $7000
• Administrative payment (one lender was cited for employment violations)
• FHA approved lender status revoked

In addition, FHA approved lender status was suspended for one year for 127 companies failing to meet FHA annual review criteria.

FHAis certainly sending a strong message to current and future approved lenders deviating from FHA guidelines (other than the ongoing practice of “investor overlay, which occurs when FHA lenders arbitrarily increase minimum credit scores and/or underwriting criteria for FHA loans). The back story on this crackdown is based on FHA taking on the fallout from sub-prime lending practices; the number of loans insured through FHA burgeoned as sub prime lenders fell by the wayside. Growing pains can be costly, as FHA learned when its cash reserves for reimbursing lenders for losses on defaulted loans tanked to levels well below the legal minimum.

FHA looking forward: Compliance enforcement  good for preventing problems

Faulty loan underwriting, lending discrimination, and sloppy loan approval practices cost FHA as the agency insures mortgage lenders against losses incurred when mortgage loans fail.  FHA exposure to potential losses has increased as conventional lenders have stopped making mortgage loans to moderate income and credit challenged buyers along with anyone who cannot bring 20 percent down to the closing table.  Honoring its mission to help Americans of moderate means afford homes, the agency also must be diligent in managing risk. Making loans with a minimum of 3.5 percent down, a minimum FICO score of 500, and permitting “alternative” forms of credit including submitting utility bills and rent receipts are some ways that FHA helps “non-traditional” home loan applicants achieve home ownership.

Shopping FHA lenders: Too good to be true? Find another lender

When shopping for FHA mortgage loans, it’s important to be wary of offers seeming too good to be true.  Loan officers advising you not to worry about signing mortgage documents, or asking you to sign blank documents under the guise of “making loan approval easier” should be avoided.  Mortgage lenders approving loans without required documentation or using fraudulent information can cause problems for prospective borrowers. Signing incorrect or misleading mortgage documents can be prosecuted as a federal crime. Comparing FHA  mortgage quotes from several lenders, heeding your instincts if something seems suspicious, and asking questions throughout the mortgage application and approval process can assist with finding your best FHA loan.

Full post as published by FHA Mortgage Guide on January 02, 2011 (boomark / email).