FHA Terminations Hit MBA Officer

Poor performance in originating Federal Housing Administration (FHA) loans led HUD, or the U.S. Department of Housing and Urban Development, to terminate certain lenders from participating in the FHA insurance program, according to a Federal Register notice dated Aug. 20.

HUD said the “cause” for FHA approval termination under its Credit Watch initiative program, is having a default and claim rate, for loans endorsed within the past two years, that exceeded both the national rate and 200% of the local HUD field office rate.

After a six-month period, lenders have the option to reapply for FHA origination approval if they continue to meet FHA lending requirements and whether the Secretary determines the underlying causes that led to termination have been remedied.

One lender listed on the notice as exceeding the default and claims rate was the Horsham, Pa., branch office of Gateway Funding Diversified Mortgage Services, whose president and CEO, Regina Lowrie, is a vice chairwoman of the Mortgage Bankers Association of America (MBA).

Lowrie explained that although Gateway’s number of FHA defaulted loans has decreased over the past two years, its number of FHA loan originations has dropped by nearly 50%. A decreased number of FHA loans raised Gateway’s percentage of defaulted loans from 4% to over 6% and led to suspension from the FHA insurance program.

She added that about one-third of the company FHA defaults are from streamline refinance transactions that Gateway did not originally underwrite. And, while Gateway’s FHA loan default rate has inched up, the “overall quality of our book of business has not decreased.”

“I think it’s an industry issue,” Lowrie said. “At times I fully support HUD’s Credit Watch Initiative … but, I also think there should be explicit exemptions for higher-risk products,” such as those that help first-time homebuyers achieve homeownership.

She pointed out that defaults have increased in the Philadelphia region as a whole, and that Gateway’s FHA-terminated branch serves a lower income and minority census tract.

MBA did not comment on Gateway, but was on the same train of thought. MBA spokeswoman Laura Armstrong said HUDs program needs modification, particularly when comparing lenders that specialize in higher-risk products.

“We support the Credit Watch Initiative as a credit-monitoring tool,” Armstrong said. “However, we look at it as an industry issue that perhaps needs tuning.”

The FHA branch suspension isn’t the only problem Gateway is grappling with. According to an announcement yesterday from the law firm of Lowenstein Sandler, Lowrie and Gateway’s two other principals, Paul Catinella and Michael Karp, are being sued in a Federal Court in New Jersey for allegedly perpetrating a fraudulent scheme and allegedly profiting from the unlawful activity.

John Field and Marty Witzburg, co-managers of Gateway’s Morristown, N.J., branch office, reportedly filed the lawsuit to recover the millions of dollars of profits they have allegedly been deprived of over several years. In the lawsuit, Gateway is accused of violating the Racketeer Influenced and Corrupt Organizations Act and failing to pay Field and Witzburg for business generated from loan officers the company recruited to work within the New Jersey branch office territories.

Another lender that lost its FHA approval was a Portage, Mich., branch of Amerifirst Financial Corp., which was terminated from originating FHA-insured single family mortgages within the areas of two Michigan HUD field jurisdictions — Detroit and Flint.

Meanwhile, Alliance Mortgage Banking Corp. reportedly had two New York-based branches ousted from the FHA insurance program.

According to the Federal Register notice, the following companies had branches in the named locations prohibited from FHA loan originations.