Is FHA Recovering its Losses on Bad Mortgages?
June 3rd, 2010
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It’s time for FHA to identify and hold its approved lenders accountable for not following FHA guidelines when originating new FHA loans. In a recent blog for the Wall Street Journal, Peter Eavis notes that both Fannie Mae and Freddie Mac require mortgage lenders to repurchase mortgages failing to conform to their underwriting and loan servicing guidelines. Holding FHA approved lenders accountable by requiring lenders to reimburse FHA for losses on bad loans provides both preventative and remedial enforcement of FHA guidelines and lending requirements.
As Mr. Eavis points out, it’s unclear whether FHA is pursuing reimbursement for losses caused by bad loans. With its reserves falling, the lack of reporting and/or enforcement by FHA could lead to taxpayers paying for losses on loans that should never have been made by FHA lenders or insured by FHA.
Bad FHA mortgage loans: If you make them, you pay for them
This paraphrasing of a popular retail slogan sums up the idea behind requiring mortgage lender to reimburse FHA for its losses on poorly originated loans. FHA currently insures about one third of residential mortgages, up from single digit percentages a few years ago. FHA reimburses mortgage lenders for losses associated with foreclosure and loss mitigation effort; the agency’s increasing market share renders it increasingly vulnerable to losses arising from mortgage defaults.
Holding FHA lenders accountable: how requiring reimbursement could help
By requiring its mortgage lenders to reimburse FHA for claims paid on delinquent and foreclosed mortgages, FHA could make progress toward reinstating its reserves to mandated levels. This would help with soothing the concerns of legislators and taxpayers. Enforcing reimbursement requirements would encourage mortgage lenders to follow FHA guidelines.
Establishing and enforcing a comprehensive reimbursement program would assist with reducing FHA’s inventory of foreclosed homes. Mortgage lenders cited for improper activity associated with FHA insured loans could be required to accept title to foreclosed properties in addition to reimbursing FHA for any claims paid.
Increased review of FHA approved lenders: By identifying mortgage loans requiring reimbursement to FHA, problem areas can be identified. Problems include lenders habitually ignoring FHA guidelines and mortgage fraud schemes resulting in mortgage defaults and foreclosure.
Enforcing FHA mortgage reimbursement: Who would pay for it?
The foremost concern with government programs is a potential burden on taxpayers. Mortgage lenders would pay for reimbursing FHA for losses on bad mortgage loans, but to put a comprehensive policy and program in place, FHA would have to hire and train employees familiar with mortgage lending, servicing and auditing mortgage loan underwriting and servicing records.
Concerns over adding another complex level of bureaucracy to the mortgage lending process are legitimate. Buying or refinancing a home is already complicated, and with increased FHA recourse hanging over their heads, it’s a good bet that mortgage lenders would find ways to pass on the potential costs to consumers.
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This entry was posted on Thursday, June 3rd, 2010 at 1:32 pm 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.
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