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FHA Policy, Procedure and Performance

FHA News

Everybody seems to have an opinion about what should be done to limit losses at the Federal Housing Administration. As the agency assesses its own operations and implements federal legislation — a host of new guidelines, procedures and warnings have emerged.

More clarification was given by the Department of Housing and Urban Development about “unresolved findings” in Mortgagee Letter 2010-38. Mortgagees have to confirm that such findings are not pending against their employees, executives or owners. Unresolved findings, including federal lawsuits, could have resulted from audits, investigations or reviews conducted by HUD or other U.S., state or local regulatory agencies. Violations of the Fair Housing Act, the loss of a state license or other HUD mortgagee actions also apply.

Mortgagee Letter 2010-38 additionally outlined the proper procedures for notifying HUD of business or address changes at the mortgagee.

Any borrower who has been convicted of a felony larceny, theft, fraud or forgery as well as money laundering or tax evasion is prohibited from receiving incentives under the federal refinance program for negative-equity borrowers. The requirements were incorporated into the Emergency Economic Stabilization Act, according to Mortgagee Letter 2010-35. Borrowers must sign a certification, though mortgagees are not required to obtain criminal background reports.

Temporary authority to insure multifamily projects where construction has already started was authorized in Mortgagee Letter 2009-26 only until Feb. 26. But the market for multifamily construction loans is still lacking, so HUD extended the program another year in Mortgagee Letter 2010-27.

HUD said in a public filing last month that all licensed real estate brokers can participate in its Management & Marketing III program for the sale of real-estate-owned properties, though they need to be selected as a listing broker by HUD’s asset manager vendors.

In October, a public filing by HUD discussed a proposed rule that would provide guidance on indemnification requirements with mortgage fraud, misrepresentation or noncompliance. It also would enable HUD to continually monitor mortgagees and streamline approval for mortgagees that undergo a corporate restructuring.

HUD said in a July letter that it was launching multiple investigations into mortgage lenders for alleged illegal discrimination against expectant mothers and new parents. The federal agency said that, under the authority of the Fair Housing Act, it requires mortgagees to review borrower income “to determine whether they can reasonably be expected to continue paying their mortgage for the first three years of the loan.” But lenders can’t inquire about future maternity leave and must “document the borrower’s intent to return to work, that the borrower has the right to return to work, and that the borrower qualifies for the loan taking into account any reduction of income due to their leave” if a borrower is on maternity or short-term disability leave at the time of closing.

“Lenders have every right to ascertain the incomes of families to determine whether they are eligible for a mortgage loan, but they have no right to use a pregnancy or a short-term disability as a cause to deny that family a mortgage they would otherwise qualify for,” HUD Secretary Shaun Donovan explained.

Written testimony from Mathew J. Scire, director financial markets and community investments at the Government Accountability Office, was prepared for the Senate Committee on Banking, Housing and Urban Affairs in September. Scire reviewed a report from his agency about how to improve management and oversight of FHA’s financial condition.

Scire said that the capital ratio of the Mutual Mortgage Insurance Fund fell below statutory requirements because of a combination of economic and market developments. He noted that more pessimistic economic forecasts dragged down the value of the fund, while increased FHA demand boosted the book of business. Although enough funds are in place to cover existing claims, new claims could exceed the balance.

“FHA has implemented or proposed a number of steps to help improve the financial condition of the fund, including adjustments to its insurance premiums and underwriting policies,” the testimony said. “However, certain legislative requirements concerning FHA’s administration of the fund provide limited direction to the agency.”

Problems at the fund came to light in September 2009, when the capital reserve level fell to 0.53 percent, “well below the requirement of two percent from the 1990 Cranston-Gonzalez National Affordable Housing Act,” according to a report from the Mortgage Bankers Association. The level was a public signal that changes were needed.

MBA calls for more appropriation to hire additional staff and implement modern information technology. The trade group also recommends a re-examination of FHA loan limits, expanded authority for HUD to raise mortgage insurance premiums and the ability for the FHA commissioner and HUD secretary to jointly suspend problem mortgagees.

Washington, D.C.-based MBA was among several trade groups that earlier this year issued a letter to four senators in support of H.R. 5072, the FHA Reform Act of 2010, which the House passed in June.

Former Fannie Mae chief credit officer Edward Pinto co-authored a Nov. 30 article warning that FHA is headed down the same road taken by Fannie and its government-controlled cousin, Freddie Mac. The two firms, according to Pinto — now a resident fellow at the American Enterprise Institute — failed because of high-risk mortgage initiatives taken by Congress in 1992, and the Dodd-Frank act has FHA doomed to repeat history unless it is significantly amended.

“As in the period leading to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size,” the paper said. “When it collapses, housing prices will drop and a financial crisis will ensue.

“And, once again, the taxpayers will have to bear the costs.” boasted in a recent statement that HUD recognized the Dallas-based firm as “one of the top five FHA lenders in the Dallas/Fort Worth area.”

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