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New FHA standards set to begin January 1st

by Peter G. Miller
December 20th, 2010

Starting January 1st the process of getting an FHA loan is scheduled to change, but will there be much practical difference for borrowers?

It was back in April that the FHA announced a serious challenge to the lending industry: In basic terms the idea is that lenders will have more responsibility for the independent mortgage brokers who bring them loans.

The FHA explained the changes this way:

First, “FHA-approved lenders currently assume liability for all the loans they originate and/or underwrite,” said HUD. “While mortgage brokers will continue to be able to originate FHA-insured loans through their relationships with approved lenders, they will no longer receive independent FHA eligibility approval. These changes align FHA with Fannie Mae and Freddie Mac and have potential to increase the number of mortgage brokers eligible to originate FHA-insured loans while providing for more effective oversight of brokers by FHA-approved lenders.”

Translation: Well, yes, more mortgage brokers will be able to sell FHA loans but only IF a lender is willing to accept their loan packages. In practice, you can imagine that a lot of lenders will want to dump independent mortgage brokers to bring the business in-house.

Second, “mortgage brokers or other third-party originators, already approved by FHA, will be authorized to continue to originate FHA-insured loans through the end of the calendar year without sponsorship of an FHA-approved lender. Commencing January 1, 2011, however, the origination authority will end.”

Translation: If you’re a mortgage broker you better find lenders to buy your mortgages because the FHA will not longer insure them directly.

Lender Responsibility

You can pretty much see what’s going on here. The government wants to reduce risk so it has stiffened FHA guidelines during the past two years and changed the insurance premium scheme. At the same time it dumped large numbers of loan sellers who were not meeting its standards and shifted more responsibility to mortgage originators.

In practical terms borrowers might see a few changes.

First, there will be fewer places offering FHA loans. This has already happened with the removal of some 1,500 loan originators from the FHA approval roster and it will happen again as mortgage brokers find it hard to line up lenders to take their loans.

Second, with the passage of the Dodd-Frank Wall Street Reform Act this summer lenders have toughened their underwriting standards. In practice, virtually all mortgages now conform to basic FHA loan requirements in terms of verifying income and employment and showing a tangible net benefit to borrowers with each loan.

Third, it would not be surprising if the date was pushed back from January 1st. This sometimes happens with HUD deadlines.

Interestingly, the changes required under the Wall Street Reform Act are working out very well for lenders. The Mortgage Bankers Association says “independent mortgage banks and subsidiaries made an average profit of $1,423 on each loan they originated in the third quarter of 2010, up from $917 per loan in the second quarter of 2010.”

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