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Who Wins & Who Loses With Tougher FHA Mortgage Standards?

by Peter G. Miller
December 7th, 2009

Back in June the Mortgage Bankers Association came out in favor of tougher standards for FHA mortgage lenders. The MBA said:

“Currently, FHA requires mortgagees to have a minimum net worth of $250,000 in order to be qualified to underwrite FHA loans. Brokers must have a net worth of $63,000. MBA believes that both standards should be increased to make these industries more accountable.

“Specifically, we recommend that mortgage bankers should have a minimum corporate net worth of the greater of $500,000 or 1 percent of FHA loan volume up to a maximum of $1.5 million. Mortgage brokers should have a minimum corporate net worth of the greater of $150,000 or half of one percent of FHA loan volume up to the minimum for mortgage bankers. MBA supports mortgage bankers and brokers maintaining a bond sufficient to provide reasonable protection to consumers and taxpayers.”

HUD has now responded with proposals for tougher standards for FHA mortgage lenders — much tougher. It has proposed lenders maintain a minimum of $1 million in net worth within the first year and at least $2.5 million of net worth within three years of the effective date of the rule.

HUD also said this:

“FHA-approved Mortgagees must assume liability for all the loans they originate and/or underwrite. While loan correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees, they will no longer receive independent approval for origination eligibility. This will require the FHA-approved mortgagee to assume responsibility and liability for the FHA-insured loan underwritten and closed by the approved mortgagee. These changes align FHA with Fannie Mae and Freddie Mac and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to participate in the origination of FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.”

Good or Bad?

You can see what HUD is doing — it is trying to reduce mortgage risk by making sure that lenders have more on the line, both in terms of cash and liability.

However, there is also something else going on here. The equation used by both the MBA and HUD assumes that more lender capital equals a higher quality of loan production. This is simply unfounded.

Ask yourself a question: Who were the major purveyors of toxic loans? It was NOT small community banks or credit unions, it was huge institutions with multi-billion dollar portfolios. All the capital in the world did not stop them from issuing loans which were inherently bad for borrowers — and equally bad for lenders.

Higher capital requirements should generally be welcomed — but don’t forget that higher capital requirements also limit lender competition by raising barriers to entry. That’s not a bad side effect if you’re an established lender.

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This entry was posted on Monday, December 7th, 2009 at 11:30 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Who Wins & Who Loses With Tougher FHA Mortgage Standards?”

  1. Nathan Reynolds Says:

    I have followed your site and posts for almost two years now. I agree with 95% of your posts.

    And might I state that you are spot on in your statement that, “Higher capital requirements should generally be welcomed — but don’t forget that higher capital requirements also limit lender competition by raising barriers to entry. That’s not a bad side effect if you’re an established lender.”

    My fear as a mini-eagle FHA approved lender is not the higher capital requirments, it is that Big Banks will have the ultimate authority to grant access to FHA loan products. I believe we are witnessing the end of competition in the market place and the Big Banks ultimate goal of dominating the mortgage industry will soon be realized.

    Homeowners benifit from a competition as it keeps closing costs down and a hedge on interest rates. With the mortgage bankers and brokers seat removed from the table, a mortgage lending monopoly controlled by the Big Three will only fuel the current housing crisis and hurt homeowners.

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