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FHA Underwriting Authority Impacted by Performance

Mortgagee letter reviews direct-endorsement underwriting authority

Jan. 25, 2010

By MortgageDaily.com staff


Mortgagees could be stripped of their underwriting authority under new Federal Housing Administration procedures that consider the level of delinquency and claims.

Up until now, the U.S. Department of Housing and Urban Development has focused on originators with high default rates.

But in Mortgagee Letter 2010-03 Friday, HUD said it will now also target underwriters.

"At present, HUD exercises its authority to terminate only the loan origination approval authority of a mortgagee," the letter said. "Effective with this mortgagee letter, HUD will systematically review all direct-endorsement underwriting mortgagees' defaults (loans 90 or more days delinquent) and claim rates on loans during the initial 24 months from the date of the commencement of the amortization."

HUD will analyze the quarterly reviews and determine whether a mortgagee should lose its direct-endorsement underwriting authority. The determination will factor in the mortgagee's single-family default rate compared to regional Credit Watch Termination thresholds. Actions will be separate from any action taken by HUD's Mortgagee Review Board.

If loans underwritten and closed by mortgagees within the past 24 months have a default and claim rate that is 200 percent higher than the rate at HUD's local field office, the mortgagee will be subject to termination. In order to avoid the impact of unusual circumstances, a minimum number of defaults and claims will be established. But a continued trend of high defaults -- even at a low-volume mortgagee -- could result in HUD action.

Termination of direct endorsement underwriting does not impact a mortgagee's authorization to purchase, hold or service FHA-insured loans.

In areas that meet the Office of Management and Budget's definition of underserved areas, loan performance will be compared to the field office average for similar loans.

Application of the new procedures will be gradually implemented, with the 24 months ended on Dec. 31, 2009, being subject to a 300 percent termination threshold. As of June 30, the threshold drops to 250 percent then reaches 200 percent at the end of this year -- where it will remain thereafter.

Impacted mortgagees, however, can appeal prior to the termination. They can also apply again after six months if HUD determines that the underlying causes for the termination have been remedied. An independent review of the terminated operations and underwriting by a Certified Public Accountant must identify the causes of the poor performance, and the mortgagee must provide a written corrective action plan to address each of the issues identified in the CPA report as well as proof the plan has been implemented.

Terminated mortgagees lose their authority 60 days after the termination notice within the area of the local field office where they exceeded the default rate. Loans they closed or obtain approval on before the termination can still be submitted for endorsement. All other loans need to be transferred to an approved mortgagee.

Loan correspondents impacted by a mortgagee's termination will have 30 days to establish a new relationship with another FHA-approved mortgagee if they had only one sponsor in the area.

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