Originators and underwriters with high default rates on their FHA-insured mortgages face a revised set of rules.
The Department of Housing and Urban Development recently amended guidelines to the Federal Housing Administration Credit Watch Termination Initiative. The finalized rules will take effect starting March 1, according to a Federal Register notice.
The final rule provides that both originators and underwriters will be considered to be on Credit Watch Status if they have a default and claim rate on insured mortgages that exceeds 150 percent of the normal rate and its origination approval agreement has not been terminated. Termination will result only if the defaults and claims rate exceeds 200 percent of the normal rate and exceeds the national rate.
Also, the new guidance will reportedly consider the date of mortgage origination, rather than the date of FHA insurance endorsement, as the day the loan transaction commences to amortize.
Prior to the final rule, HUD said FHA systematically reviewed only originators' default and claim rates on FHA loans endorsed within the past 24 months and placed them on Credit Watch Status if their rate of defaults and claims on loans exceeded "150 percent but not 200 percent of the normal rate." This regulatory "cap" had the "potential to create a gap in HUD's Credit Watch monitoring and enforcement efforts, since mortgagees with default and claim rates falling between 200 percent of the normal rate and the higher threshold being used for terminations would neither be placed on Credit Watch Status nor have their Agreements terminated," HUD said.
The new rule eliminates "the need for regulatory waivers to authorize placement of mortgagees with default and claims rates greater than 200 percent on Credit Watch status," HUD said.
Additionally, those who receive a proposed termination of FHA mortgage origination approval will be prohibited from establishing a new branch in the lending area covered by the proposed termination. This closes "a loophole previously used by mortgagees to evade HUD's existing procedure for reviewing losses to the FHA mortgage insurance fund," as they would establish new branches to replace the authority which was or would be lost from proposed termination of the existing branches, HUD reported.
Instead of providing a written notice, FHA will now electronically notify participants of Credit Watch status through the online Neighborhood Watch Early Warning System in order for a "streamlined and more effective method of monitoring mortgagee performance," HUD said.