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FHA Mortgagees Face Stiffer Requirements

Moves expected to bolster FHA insurance fund

Jan. 20, 2012

By staff

Federal Housing Administration mortgagees will be subject to more rigorous peformance standards under new regulations that will also revise the process of reimbursing the cost of insurance claims when FHA rules weren't followed. Another change is being proposed that will reduce the incentive to inflate values on appraisal reports.

The process used by FHA to demand that mortgagees indemnify the Department of Housing and Urban Development on insurance claims is being strengthened. Indenmification is required when FHA guidelines were not followed, and the updates clarify that indemnification could be required for "serious and material" violations of FHA origination requirements. Fraud and misrepresentation that should have prevented the mortgagee from endorsing loans is also cause for indemnification demands.

HUD made the changes to strengthen the finances of FHA's Mutual Mortgage Insurance Fund, an announcement Friday said. The move is expected to help FHA better manage risk.

In addition, becoming approved as an FHA mortgagee with the authority to insure loans on HUD's behalf, and maintaining that approval status, will require stricter performance standards. More than 80 of FHA-insured loans are originated by this group.

The mortgagee's serious-delinquency rate and claim rate must be at or below 150 percent of the state rate for a two-year period. Ongoing mortgagee performance by state will be monitored to ensure ongoing eligibility.

HUD said the new rule clarifies the process for HUD-approved lenders created through a corporate merger, acquisition or reorganization.

"Taken together, the changes announced today will protect FHA's insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD's underwriting expectations," Acting FHA Commissioner Carol J. Galante said in the news release. "FHA must continue to strike a balance between managing risks to its insurance funds and ensuring that FHA products are offered as widely as possible to qualified borrowers."

Galante said the revised rule is expected to enable more originations by FHA mortgagees.

The changes were outlined in a Final Rule that "will soon be published in the Federal Register as a final rule."

Another Federal Register notice expected to be published soon will propose limiting the maximum seller concessions to one. This is supposed to be more in line with industry standards.

HUD said that the current levels provide incentives to obtain inflated appraisal values.

read full Final Rule from HUD

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