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In the wake of its reserves falling well below mandatory levels, FHA is announcing changes to its home loan programs. After january 1, 2011, FHA will no longer accept mortgages underwritten by mortgage brokers (loan correspondents.) FHA lenders will be held accountable for all aspects of FHA home loan underwriting and approval.

FHA Strengthens Approved Lender Requirements

FHA has increased its market share of new mortgages from about 3% to approximately 33% within the past few years. The resulting expansion of FHA risk associated with non-standard lending practices has prompted FHA to revise its requirements for mortgage underwriting and net worth requirements of FHA-approved lenders. These changes are designed reduce mortgage fraud and losses to FHA caused by mortgage lenders with inadequate financial backing.

FHA Guidelines: New Net Worth Requirements for Lenders

FHA has increased net worth requirements for FHA lenders. Lenders are now required to demonstrate a minimum net worth of $1,000,000 with 20% in cash or other liquid assets acceptable to FHA/HUD. For lenders qualifying as small businesses as defined by the Small Business Administration (SBA), minimum net worth is set at $500,000, with 20% in cash or liquid assets. Enforcing net worth requirements assists FHA with ensuring that mortgage lenders have sufficient capital for reimbursing FHA for losses associated with improper mortgage underwriting.

FHA Ceases Approval of Mortgage Correspondents

FHA is holding its approved lenders additionally accountable by unloading its responsibility of approving mortgage correspondents, popularly known as mortgage brokers. As of May 20, FHA terminated its approval process for mortgage brokers, and as of January 1, 2011, will not accept any loans directly submitted by mortgage brokers. Although mortgage brokers sponsored by FHA-approved lenders are permitted to submit mortgage application packages, FHA-approved lenders assume full responsibility for underwriting these mortgages. Lenders will be required to reimburse FHA any losses associated with loans failing to meet FHA guidelines whether originated by a sponsored broker or the lender.

FHA Loans: Fewer Brokers Means Fewer Loan Sources

Concerns about eliminating FHA-approved mortgage brokers include the potential for restricted availability of FHA home loans as its approved lenders assume the task of underwriting and approving all broker-submitted FHA mortgages. Backlogs and delays are possible as lenders take on the task of approving loans that used to be underwritten and approved by mortgage brokers.

Consumers seeking FHA financing for a home loan or mortgage refinance can obtain mortgage quotes from multiple FHA lenders. Taking time for comparing loan quotes and negotiating your best deal can help with saving money and avoiding misunderstandings at the closing table.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.