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More FHA Reforms Ahead

Secretary Donovan testifies before House committee

Dec. 2, 2009

By MortgageDaily.com staff


Lenders that originate loans insured by the Federal Housing Administration face increased accountability, while FHA borrowers will be expected to have more invested in the loans, according to Congressional testimony today. Other reforms on the table include increased mortgage insurance premiums, higher credit scores and lower seller-paid costs.

U.S. Department of Housing and Urban Development Secretary Shaun Donovan made the comments today before the House Committee on Financial Services at a hearing on FHA's actuarial report, according to a copy of his prepared statement.

The secretary -- who noted that FHA loans account for 30 percent of purchase transactions and 20 percent of refinances -- referenced a round of FHA policy changes announced in September and warned there will be more.

"With the clearer picture provided by the recent study conducted by a non-governmental independent actuary, I want to announce here today that we will be implementing additional measures that we believe will further reduce the risk to the FHA portfolio," Donovan stated. "In these measures we will be focusing primarily on three areas: enforcement, improving the quality and sustainability of new loans insured by FHA, and increasing FHA capital."

Donovan said 51 percent of mortgages to Blacks last year were insured by the agency, while 45 percent of loans to Hispanics were FHA.

He said that the FHA he inherited "was simply not properly managing or monitoring its risk." The secretary called credit and risk controls antiquated and enforcement "weak." He said information technology and personnel resources were inadequate.

Donovan said the actuary projected that 71 percent of FHA losses during the next five years will be from loans already on the books.

Including Taylor, Bean and Whitaker Mortgage Corp., Donovan said seven FHA lenders have been suspended this year. In addition, FHA approval was withdrawn for 270 firms -- including Lend America on Monday.

In addition to a number of steps outlined by Donovan that have already been taken by the agency, he said one of the first additional steps to be taken will be to increase lender accountability for loans not underwritten to FHA standards. Mortgagees will be responsible for origination quality and compliance with FHA policies. They will also face increased compliance reviews and expanded enforcement.

Mortgagees will be required to indemnify the FHA fund when they fail to meet FHA requirements.

While HUD only sanctions mortgagees at the branch level currently, it is expected to begin holding lenders accountable nationally.

Donovan said performance by FHA lenders will be posted online.

Other plans under consideration include a reduction in seller-paid costs to 3 percent from 6 percent, an increase in the minimum acceptable FICO score and a boost to the cost of FHA mortgage insurance premiums. Donovan noted that HUD is requesting authority from Congress to raise annual premiums and to hold FHA lenders responsible for fraud and misrepresentations.

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