Poor underwriting on Federal Housing Administration loans cost a Massachusetts mortgagee more than $70,000. A proposed rule seeks to hold all FHA lenders liable when they don’t follow guidelines.
The settlement was announced Friday by the Department of Housing and Urban Development.
At issue is an alleged failure to “fully verify whether borrowers could sustain their mortgage payments prior to refinancing their loans,” the statement said.
According to HUD, First American Mortgage Trust refinanced mortgages for borrowers with serious credit delinquencies, but it did not properly analyze the households’ ability to manage credit.
The settlement between the Brookline, Mass.-based company and the FHA Mortgagee Review Board includes an agreement to reimburse FHA $72,500 for past insurance claims. In addition, First American agreed to indemnify FHA for any claims on five loans if they default during the next five years.
“FHA-approved lenders are obliged to apply our underwriting standards, not only to protect our insurance fund, but to make certain families can sustain their mortgages,” Acting FHA Commissioner Bob Ryan said in the notice. “Due diligence is at the root of mortgage lending protecting lenders, the FHA, and certainly homeowners from the prospect of foreclosure.”
The Mortgagee Review Board boasted about the 19 administrative sanctions it has taken so far this year against lenders. Those sanctions included reprimands, probations and suspensions as well as withdrawals of approval and civil money penalties.
The announcement discussed a rule proposed in October 2010 by HUD to increase its authority to force mortgagees to indemnify or reimburse FHA when claims are paid and underwriting guidelines were not met. The proposed rule also calls for tougher mortgagee performance standards.
HUD is looking to force lenders that can endorse loans on FHA’s behalf to indemnify FHA when there are “‘serious and material’ violations of FHA origination requirements such that the mortgage never should have been endorsed by the mortgagee in the first place just as FHA would not have insured the mortgage on its own.”
Among violations that would invoke indemnification are the failure to verify and analyze creditworthiness, income and employment. Other violations include failure to verify the source of downpayment funds and not addressing property deficiencies identified in the appraisal that impact the health and safety of the occupants or the structural integrity of the property.
In addition, HUD is targeting mortgagees who don’t make sure that appraisals meet FHA requirements.
“HUD may seek indemnification irrespective of whether the violation caused the mortgage default,” the message stated.
The maximum claim and default rate will be limited to 150 percent of the local rate over the past two years.
