The increased scrutiny, mortgage bankers complain, would finish recent attempts to provide home loans to borrowers with marginal credit, something the FHA has been striving to spur for years. Those with FICO scores below 640 would be especially hard hit, industry executives state.
“FHA says they are striving to encourage more lending to underserved borrowers, but the more they inspect lenders, the less eager lenders are to make loans,” says Clement Ziroli Jr., president of First Mortgage Corp., an FHA lender in Ontario, Calif.
The plan comes in an inopportune time for the industry. Mortgage originations have fallen 15 % to 20 % in the past four months compared with a year earlier, and some lenders are choosing to relax underwriting standards such as FICO scores to drum up more business.
On Tuesday FHA Commissioner Carol Galante described the agency’s “quality assurance” framework on a conference call with Shaun Donovan, secretary of the Department of Housing and Urban Development, to discuss HUD’s 2015 budget.
Donovan said, ” FHA has stepped up Quality Assurance enforcement to hold lenders responsible for mistakes that were made in the crisis … we are attempting to … supply as much transparency and clarity about what that enforcement will look like.”.
Donovan defined an additional administrative fee to lenders as a “direct cost,” that would most likely get passed on to consumers.
Ultimately, he argued, the program will help reduce costs and improve access to credit for some borrowers “because the work we are going to do will decrease uncertainty.”.
FHA has the authority to gather as much as $30 million in fees from lenders to fund its proposed quality assurance program, which would permit the agency to conduct more loan reviews, typically within six to nine months of a loan’s origination, to ensure lenders are following rules. Fannie Mae and Freddie Mac ramped up their quality control programs last year to help minimize the risk to lenders of costly mortgage buybacks.
FHA’s proposed program, which will be open for public comment when it is published soon in the Federal Register, gets to identify loans that are looked as defective and to provide reports to lenders so they can strengthen their processes.
Few details have been released about how the fee would be structured, whether it would be evaluated on all lenders based on volume or whether the agency had designed a policy yet on the issue. The fee likely would be assessed as a part of HUD’s 2015 fiscal budget, starting in September.
In theory, lenders need to indemnify FHA for loans that are defective, essentially self-insuring the loan so taxpayers are not on the hook for prospective losses. The increased focus on quality control stems from the extraordinarily large number of loans that went unpaid during the financial crisis, and a lack of oversight by lenders to guarantee loans met underwriting standards.
David Stevens, president of the Mortgage Bankers Association and a former FHA commissioner, questions whether the quality assurance program would elevate FHA’s objective of providing financing to as many families as possible.
“No one can argue that the FHA shouldn’t do more quality control,” Stevens says. “But lenders can now view themselves at far greater risk, with more ongoing scrutiny and more time spent reviewing loan files.”.
Stevens recommends the FHA to provide more information on which kinds of errors make up what is known in the industry as a “material defect,” the type of problem that would restrict the agency from guaranteeing a loan. FHA loan files are getting be huge– up to 500 pages long– and a considerable number are looked at to be deficient in some way, even if the mistake does not necessarily mean the borrower will potentially default on their loan.
“This quest of the perfect loan file is a virtual impossibility,” Stevens says. “We’ve been calling on FHA to better define what defects will create an obligation for indemnification.”.
Brian Chappelle, a partner at consulting firm Potomac Partners and a former FHA official, said the quality assurance fee came out of nowhere.
“I am stressed that this fee and its purpose could deliver the wrong information to the industry,” Chappelle says. “Instead of encouraging lenders to increase access to credit, I am worried many lenders will respond to this program by tightening requirements even more.”
Unexpectedly, Donovan informed reporters that he has been “encouraged” by lenders’ loosening of some credit overlays, a phrase used to define a requirement that an originator adds above and beyond what FHA needs.
FHA will accept loans with FICO scores as low as 580, but many lenders will only write loans to borrowers with a score of 640 or over.
Even though the lenders want to make loans, the additional scrutiny of the FHA, and the CFPB of loans to meet the new QM (Qualified Mortgage) and ATR (Ability to Repay) rules, are having an effect on lenders approving loans.