The Federal Housing Administration (“FHA”) has announced two initiatives in the last two weeks to avoid being the cause of the next subprime crisis. These initiatives aim to punish lenders who may have fraudulently marketed and sold FHA-backed loans to consumers, while also reducing the riskiest consumers’ access to FHA-backed loans. The FHA is a government mortgage insurer, and a division of the Department of Housing and Urban Development (“HUD”). If a mortgage meets FHA’s criteria, then the agency will insure the lender of the mortgage against losses caused by a homeowner’s default.
After the collapse of the subprime mortgage market in 2007, the volume of FHA-backed mortgages increased exponentially, as it remains one of the few mortgage products that lenders could market as a low downpayment option. The potential for fraud and other losses on these high volume loans have prompted the FHA to announce new standards and seek enforcement measures.
The new policies create more stringent standards for consumers that are marketed FHA-backed loans. FHA will increase the up-front mortgage insurance premium from 1.75% to 2.25%, while also seeking legislative power to charge a higher annual mortgage insurance premium. FHA will also limit the availability of 3.5% downpayment mortgages to borrowers who are not considered subprime, with all other borrowers required to provide at least a 10% downpayment. Additionally, FHA will propose a reduction in allowable seller concessions from 6% to 3% to conform with industry standards.
The FHA also is aggressively investigating lenders and seeking greater enforcement powers against lenders suspected of fraud. This month, the FHA issued fifteen subpoenas to lenders with high loan failure rates. In announcing these subpoenas, the FHA stated that it will use the HUD’s Inspector General’s powers to thoroughly examine the loss claims of these companies and determine whether fraud or misrepresentations may have been involved. Additionally, this week, the FHA permanently withdrew FHA approval for three mortgage lenders, while also suspending a fourth.
HUD has stated that it will seek to complement FHA’s current efforts by lobbying to Congress for additional HUD enforcement powers aimed to further reduce the risk of fraud in the FHA mortgage process. For example, HUD will seek the power of indemnification from lenders who directly endorse FHA-backed mortgages in lieu of submitting initial paperwork on an applicant to HUD. Additionally, HUD will lobby for legislative authority to withdraw nationwide FHA-approval for lenders on the basis of their actions within one region.
While these initiatives have the potential to reduce the availability of mortgages marketed to borrowers by strengthening requirements now and aggressively using its enforcement powers to combat possible fraudulent actions, the FHA may be able to avoid the mistakes of the subprime market for both lenders and borrowers.
UPDATE: For a more extensive write-up on this issue, go here.
- Beth DeSimone and Brian Larkin
