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FHA To Lenders: This Could Happen To You

by Peter G. Miller
August 10th, 2009

Last week the FHA suspended Taylor, Bean and Whitaker Mortgage Corporation (TBW), a huge lender based in Ocala, Florida.

Published reports say the company was the third-largest FHA lender and the 12th biggest mortgage company in the country. But size doesn’t matter: A day after the suspension the company closed shop.

The suspension is big news because without FHA backing a lender cannot originate or underwrite FHA-insured mortgages. In addition, the Government National Mortgage Association (Ginnie Mae) also said TBW could neither issue nor service its Mortgage-Backed Securities (MBS).

No less important, TWB was in the mortgage wholesale business. That means it bought loans which were actually originated by local mortgage brokers, banks and mortgage bankers.

“Today, we suspend one company but there is a very clear message that should be heard throughout the FHA lending world — operate within our standards or we won’t do business with you,” said HUD Secretary Shaun Donovan.

The Reasons Why

According to HUD, “FHA and Ginnie Mae are imposing these actions because TBW failed to submit a required annual financial report and misrepresented that there were no unresolved issues with its independent auditor even though the auditor ceased its financial examination after discovering certain irregular transactions that raised concerns of fraud. FHA’s suspension is also based on TBW’s failure to disclose, and its false certifications concealing, that it was the subject of two examinations into its business practices in the past year.”

Let’s move on from TBW and discuss the FHA and lenders generally.

When a lender originates an FHA loan money goes to a borrower from a private-sector lender. The FHA is not lending money, it doesn’t have a vault stuffer with cash. Instead the FHA is involved in the lending process because it insures the loan. If something goes wrong the FHA will protect the lender. It is for this reason that you can get an FHA-backed loan with just 3.5 percent down and not 20-percent down, the real equity lenders would like to see.

The FHA, like an insurance company, wants business but it doesn’t want excess risk. It knows statistically that if loans are properly originated — if they meet the letter of FHA standards — that some loans will fail and claims will have to be paid.

The FHA also knows something else: If loans are underwritten and for some reason they do not meet FHA standards than the potential for claims is much bigger.

Layering

There has been complaining in the past few months about the process of “layering” FHA loans; that is, lenders adding extra standards and requirements before they will originate an FHA mortgage. The reason has been obvious since May when HUD penalized 120 lenders for various infractions: You don’t want to face FHA sanctions in general, and you especially don’t want to be cut off from the FHA program when it represents one-third of the marketplace, so it makes sense to assure that every loan is properly originated and underwritten.

You can pretty much bet that from this point forward it will take a little more time and paperwork to get an FHA loan — and you can also bet that FHA loan quality will improve.

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