Government changes rules for FHA lenders

by Peter G. Miller
November 3rd, 2010

When we thing of FHA mortgages we’re usually talking about HUD and the FHA itself. However, there is another government player to watch, one which has just upped the ante for FHA lenders.

The Government National Mortgage Association (Ginnie Mae) is part of the federal government. It plays an important role with the FHA mortgage program because it creates a secondary market for such loans — that is, when a lender originates a mortgage that meets FHA guidelines it can then be sold to Ginnie Mae. Armed with new capital, the lender can make more loans and thus generate more income and profits.

As Ginnie Mae explains, it guarantees “investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans — mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Other guarantors or issuers of loans eligible as collateral for Ginnie Mae MBS include the Department of Agriculture’s Rural Housing Service (RHS) and the Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH).

Ginnie Mae says its “securities are the only MBS to carry the full faith and credit guaranty of the United States government, which means that even in difficult times an investment in Ginnie Mae MBS is one of the safest an investor can make.” In today’s world such a guarantee is not to be overlooked.

All of which means that lenders want very much to meet FHA standards and to have the ability to sell their loans to Ginnie Mae. Now, however, Ginnie Mae is changing the benchmarks in a way that will knock out a number of current FHA lenders.

Net Worth Requirements

Ginnie Mae says it’s changing baseline financial requirements for lenders “in order to ensure that its program requirements align with the rapidly changing housing finance market. The changes to the financial requirements include an increase in the net worth requirement and new liquid asset and capital asset requirements.”

And just how much more will lenders need? The new base net worth requirement is rising from $1 million to $2.5 million. All current lenders must meet that standard by next October 1st, new lenders applying for Ginnie Mae approval must meet the new benchmark now.

So why is this a big deal? HUD has established new FHA rules and guidelines designed to assure that lenders actually follow FHA requirements. Having such regulations doesn’t mean a lot if they cannot be enforced.

One way to enforce the standards is to dump FHA lenders who break the rules. But another approach is to say that lenders must buy back FHA loans which were endorsed by the government on the basis of faked loan applications and underwriting. The catch is that lenders without capital have little capacity to buy back much more than a cup of coffee and three guitar strings. By raising the capital requirement to $2.5 million Ginnie Mae and HUD will be able to get real damages from lenders who fake loans, damages that are too big to ignore.

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