Lenders Fight Increased Responsibility For FHA Loans
January 13th, 2010
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In little-noticed testimony last month HUD Secretary Shaun Donovan laid out the grounds for a new FHA, one which would make lenders more responsible for the FHA loans they originate.
“We will step up efforts to ensure lenders assume responsibility for any losses associated with loans not underwritten to FHA standards,” said Donovan.
“We will hold lenders accountable for their origination quality and compliance with FHA policies, increasing our review of mortgagee compliance with FHA program requirements.
“And we intend to expand enforcement for new loans as well. That includes requiring lenders to indemnify the FHA fund for their own failures to meet FHA requirements, and holding lenders accountable nationally for any improper activities, as we are presently limited to sanctioning individual branches.”
Reading between the lines, what Donovan is saying is this: If you’re a lender and use a mortgage broker to sell FHA loans that’s fine — but if the mortgage broker does something wrong the lender will be responsible and may be forced to pay off any FHA losses.
What HUD is getting at is the idea of proper and adequate supervision. You can think about it this way: When a mortgage banker sells an FHA mortgage — and when a lender buys an FHA mortgage — that loan should meet, must meet, all FHA standards. After all, lenders are being paid precisely because they represent that the loans meet all FHA qualification standards. If that’s not the case and the FHA suffers a loss then why is that not the responsibility of the lender?
Lender Liability
As you can imagine, the lending community is aghast.
There’s the claim that the FHA and not lenders should be responsible for supervising mortgage brokers. But that’s not what Donovan is saying. He is instead saying that since lenders profit from the work of mortgage bankers they have a responsibility — a liability — for the work they accept.
Here’s the parallel: Imagine that a builder completes a home and the plumbing leaks. The homeowner does not go after the builder’s subcontractor, the homeowner expects the builder to resolve the problem. In fact, state warranty laws typically hold the builder responsible, not the plumber engaged by the builder.
Lenders want HUD to supervise mortgage brokers with no increase in lender liability. How? By increasing the capital requirements for mortgage brokers, assuring that they have more cash on hand in the case of claims against them by the FHA.
This sounds pretty good until you realize that the firms being bailed out by the federal government and the lenders who have been bought out or gone bankrupt are some of the largest lenders around. It’s not size that matters, it’s the way a lender or mortgage banker conducts their business.
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