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HUD ends limit On FHA loan fees

by Peter G. Miller
May 8th, 2011

In the ongoing effort to make the FHA loans less attractive, HUD has now removed the lender fee cap from FHA reverse mortgages and the 203(k) financing, loans used to acquire and improve homes.

To understand how this works we need to go back to December 30, 2009. If you think about that date you will quickly realize that, gee, December 30th, that’s the very end of the year, the day before New Year’s Eve, part of the week between Christmas and New Year’s Day, a time when a lot of folks are on vacation, an excellent time to change FHA loan requirements in a way which will draw the least possible attention.

So what did the FHA do? It gave billions of dollars

to the nation’s lenders, a transfer from borrowers to lenders because–after all–FHA borrowers are just loaded with cash.

As a result of regulatory changes, said HUD in 2009, the “FHA no longer limits the origination fee to 1 percent of the mortgage amount for its standard mortgage insurance programs. However, both Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps.”

Get it? There was a cap on lender fees when making FHA loans. That cap was eliminated in 2009–except for those pesky reverse mortgages and fix-up loans. Now, in 2011, HUD has gone back and gotten rid of the lender fee limitations on those loans as well.

Now you might think that HUD is allowing lenders to run wild, to charge whatever fees they like for FHA mortgages. And while the rules actually do allow unlimited fees–either you have a cap on fees or you don’t have a cap–HUD apparently thinks that moral suasion will impact lenders.

As it explained in 2009, HUD, “expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that mortgagees charge borrowers for obtaining an FHA loan and the agency does intend to issue additional guidance on the subject.”

Honest. HUD really expects that lenders will do nothing other than charge fair and reasonable fees.

Exactly what experience has HUD had that would lead them to this expectation?

In its 2010 Annual Management Report, HUD explained that “we suspended some well-known FHA approved lenders, withdrew FHA approval from over 1,500 others, and imposed over $4.27 million in civil money penalties and administrative payments on non-compliant lenders. We are sending a clear message that FHA will not do business with lenders who do not operate ethically and transparently, and are holding lenders accountable by publicly reporting lender performance rankings.”

But charging loan fees greater than 1 percent is entirely allowable. It makes FHA loans less desirable and it makes borrowers poorer. Charging steeper fees is not a transgression of any sort because now lender loan fees are entirely unlimited. There is no definition of the term “fair and reasonable.”

So, since the FHA has the authority to set fee limits, why not do that? It’s a system that worked well for decades, few lenders refused to make FHA loans and it didn’t take a stadium filled with lawyers to debate the meaning of fair and reasonable.

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This entry was posted on Sunday, May 8th, 2011 at 4:04 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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