Loan Modification

FHA Putting the Squeeze On Brokers

By Gina Pogol

On May 20th, FHA will stop evaluating and tracking the performance of the nearly 10,000 mortgage brokers that originate FHA mortgages. The agency claims that it creates an undue burden and that the private sector can do a better job policing these outfits. Instead, lenders that want to work with brokers will have to sponsor them, and they will be held responsible for what their brokers do. It’s the lenders that will eat the fallout of any brokered loans that go sideways.

Lenders are understandably leery. It was brokers who were the scapegoats in the mortgage mayhem that followed the sub-prime scandal. Because brokers don’t fund the loans they sell, they may have less incentive to present mortgage applicants objectively. Bank of America discovered, in an internal study, that mortgages originated by brokers were four to five times more likely to end up in default than loans originated by its own employees. So representatives have asked FHA for some sort of guidance, some procedures they can employ to keep themselves off the hook when it comes to brokered loans.

But wait, there’s more. FHA is seeking authority to require that all of its approved lenders indemnify it from loan losses when mortgages are improperly underwritten or documented. This would shift more risk back to lenders.

And finally…. FHA will increase minimum net-worth requirements for its approved mortgage lenders to $1 million, up from $250,000. The rules, which take effect in one year for existing lenders, may have the effect of pushing smaller lenders put of the business, or forcing them to become affiliated with bigger ones.

So why should you care? Forcing bad brokers out of the business is good for everyone — the good guys get a level playing field, the borrowers can feel safer, and the taxpayers can catch a break. But these changes could create a climate so risky and expensive for lenders that they just stop doing business with brokers — even the good ones. And if the smaller lenders get driven from the market along with FHA brokers, that saps competition. Increased costs and decreased competition could mean more expensive mortgages for all of us down the road.

Full post as published by FHA Mortgage Guide on May 11, 2010 (boomark / email).