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FHA guidelines: Commissioner requesting broader authority for enforcement

by Karen Lawson
February 19th, 2011

FHA commissioner David H. Stevens is pushing for broader authority for FHA to enforce its lending requirements among all FHA approved lenders. The agency currently requests reimbursements from certain large lenders, but the commissioner brings up a strong point that all FHA lenders should be held to account for failing to observe FHA requirements for approving loans.

The commissioner also announced that FHA is increasing its annual mortgage insurance premiums, which are paid by borrowers by 0.25 percent effective April 18, 2011.

FHA mops up the mess and strives to maintain solvency

The collapse of the sub-prime mortgage market caused FHA market share to increase quickly; some FHA lenders were approving mortgages without regard for the agency’s loan underwriting requirements. The resulting mortgage defaults drained the FHA mutual mortgage insurance fund below legally required limits.

Mortgage loan servicing companies have further contributed to FHA financial woes by signing multitudes of foreclosure documents without properly reviewing the documents and circumstances leading to foreclosures. Commissioner Stevens holds that all errant FHA lenders and loan servicers should be required to reimburse the agency for poor loan origination and servicing practices resulting in FHA claims paid to lenders.

FHA policy: What is mutual mortgage insurance, and who pays for it?

FHA does not make home loans, but guarantees its approved mortgage lenders against losses arising from failing FHA loans. This guarantee influences mortgage lenders to underwrite home loans requiring lower down payments and less stringent credit requirements than conventional mortgage loans.

FHA collects premiums from borrowers of FHA mortgage loans and deposits the funds into its mutual mortgage insurance (MMI) fund. This fund provides funds for reimbursing FHA lenders for losses resulting from mortgage loan defaults and foreclosures. FHA does not rely on taxpayers for funding MMI reimbursements, but the fund fell below legally required levels a few months ago. This event has caused FHA to review and revise its policies in an effort to re-pad the MMI fund and actively reduce future losses associated with poor lending and mortgage servicing practices.

FHA is reviewing further changes to its mortgage insurance program with the goal of reducing the agency’s market share in residential home loans. Commissioner Stevens acknowledged in his testimony the importance of balancing FHA risk exposure with providing affordable home loans. It will be interesting to see what further changes will be made to FHA home loan programs in the coming weeks, and how or if such changes will impact home buyers and homeowners wishing to buy or refinance homes with FHA loans.

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