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Can An FHA Lender Be Better Than You Think?

by Peter G. Miller
November 8th, 2010

In the past few days HUD has announced that it has suspended still more lenders from the FHA mortgage program. This is becoming routine, but this time around you have to wonder if some lenders are being hurt by numbers.

If you want an FHA loan you also want a solid lender, someone who plays by the rules. This means in part that most of the lender’s loans will be successful but some won’t. Some mortgages fail for reasons outside the lender’s control such as the loss of a job, divorce, a car accident or big medical bills.

Also, it’s not fair to judge all lenders nationwide by one standard. Because of local economic conditions there are far more foreclosures in some areas than in others. For instance, RealtyTrac reports that in Las Vegas one out of every 25 homes is in foreclosure. Meanwhile, in Boston, the foreclosure rate is one for every 240 houses. The Las Vegas foreclosure rate is nearly 10 times higher than the rate in Boston.

To assure loan quality control HUD has two interesting FHA guidelines:

First, The regulations permit HUD to terminate the direct endorsement approval of any lender who has a default rate during the past 24 months which is 300 percent higher than the local default and claim rate for other FHA lenders.

Second, HUD says it can terminate any lender who has a default rate during the past 24 months which is 200 percent of the default and claim rate within the geographic area served by a HUD field office, and also exceeds the national default and claim rate.

Okay, so HUD understands that some lenders will have more foreclosures than others simply as a matter of location and that such lenders should not be penalized. Alternatively, there comes a point where you have to say that default rates are excessive.

Go back to the RealtyTrac numbers: The average foreclosure rate is one for every 139 homes. The rate for Las Vegas is instantly five times greater than the national average. If a Las-Vegas area lender also has foreclosures which are 200 percent greater than the local average the lender could lose its FHA approval status.

It may be in a weak market that a very good local FHA lender violates the HUD standards even if it does everything right. The local market is just so weak that even the world’s best lender can run into problems.

You can see the concern here. HUD is trying to do the right thing — but if you go purely by numbers you can run into statistical problems and if you go by subjective standards you then get into the possible issue of abusive and unfair program administration.

In normal times the FHA benchmarks would be easy to understand. Unfortunately, we live in strange times, especially for hard-hit foreclosure centers. You want to encourage lending in such areas to stimulate local markets but you also want to hold down FHA claims. In a way, running the FHA loan program is like physics, sometimes the usual rules don’t work in all parts of the universe — or in all times.

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