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FHA Allows Higher Fees For Lenders

by Peter G. Miller
January 4th, 2010

HUD released a new directive for lenders which says they may charge more than a 1% origination fee for most FHA loans, those made under the 203(b) program.

Think of it as a holiday gift for lenders.

According to the HUD announcement, the FHA “no longer limits the origination fee to 1 percent of the mortgage amount for its standard mortgage insurance programs. However, both Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps.”

So how much can lenders charge?

The “FHA expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that mortgagees charge borrowers for obtaining an FHA loan and the agency does intend to issue additional guidance on the subject.”

Reasonable Fees?

There’s a lot the FHA does right but this is indefensible. Does anyone seriously think that the goal of any mortgage lender is to charge anything other than the highest fee possible? If uncapping fees makes so much sense, why is it that the limit remains on 203(k) loans and FHA reverse mortgages?

Go back a few weeks to the settlement between the FHA and the Equitable Trust Mortgage Corporation of Baltimore.

“The Federal Housing Administration (FHA) today announced that it reached a settlement agreement with Equitable Trust Mortgage Corporation (ETM) of Baltimore, Maryland, thereby terminating the suspension imposed on December 7, 2009. FHA suspended ETM’s HUD/FHA approval because ETM improperly overcharged 37 borrowers for broker and loan origination fees in excess of what the U.S. Department of Housing and Urban Development currently allows.”

Now what is the “excess” that would allow HUD to claim that a lender overcharges? Just how many dollars or what percentage of the loan amount is above a “fair and reasonable” fee?

Undermined

The idea of the FHA program is to provide mortgage insurance, largely for entry-level borrowers and those with moderate incomes. Every time the cost of financing goes up it means the pool of such borrowers gets smaller. It doesn’t matter whether expenses rise because mortgage rates go up or because lender profits increase, it only matters that borrowers are paying more.

A smaller of pool of borrowers is a terribly bad idea if only because it comes at the very time when the country needs a many homebuyers as possible to soak up the huge surplus of homes we now have. It is that surplus of inventory — supply — which is holding down real estate values for everyone. Fewer buyers mean less demand and less demand means less pressure to hold prices or even to force them up.

As the expression goes, write your elected officials.

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