Regulation Changes for FHA Lender Operations
On April 5, 2010, the Federal Housing Administration (FHA) announced more stringent criteria for lenders to become approved to issue FHA mortgage loans. In an effort to cut mortgage insurance losses, the new regulations are meant to sift out lending institutions that are not financially equipped to handle the risk associated with the increasing volume of FHA loan approvals.
Increased risk management is becoming a major focal point for FHA policymakers as the agency continues to play a larger role in the mortgage industry and in the general recovery of the American economy.
FHA Net Worth Requirements
Following the new mandate for supervised FHA lenders to submit annual financial statements, potential lenders also have new requirements for proving sufficient financial stability. The minimum net worth for all new lender applicants is now $1 million, which is four times the $250,000 that was previously required.
Existing FHA lenders will be given one year to increase their net worth according to the new guidelines if their net worth is under the minimum, but the agency will differentiate between small businesses and larger lenders in its new net worth requirements. Larger lenders must bring their net worth up to the minimum $1 million, but the minimum net worth for those lenders which are considered small businesses will be $500,000.
After three years, the net worth requirement for all FHA lenders and lender applicants will be $1 million plus a percentage of any total loan volume over $25 million.
Broker Liability for FHA Lenders
Beginning January 1, 2011, mortgage brokers will no longer be independently approved as FHA loan originators. They may continue to operate as such until then, but they must be sponsored and supervised by an approved FHA lender after that date.
Since lenders are already liable for the success or failure of each mortgage loan they underwrite, whether the lender or the broker originated the loan, this change is expected to enhance an FHA lender’s ability to focus on and work with mortgage brokers who are aligned with the level of risk management and loss mitigation now demanded by all stakeholders in the American housing market.
For more information, please visit the original FHA press release.
Risk Management at the FHA
On September 18, 2009, the Federal Housing Administration (FHA) announced some proposed changes to credit policies and procedures which are expected to mitigate risk in the mortgage industry. The changes, which took effect on January 1, 2010, are intended to be new stepping stones toward protecting FHA lenders from future financial weaknesses in the mortgage industry. The new risk management policies could also reduce the likelihood of future Congressional intervention in the housing market.
As FHA mortgages become a more viable option for many potential American homeowners, the FHA’s goals include helping the growing number of FHA lenders practice responsible lending and risk management strategies. With consequences for poor lending decisions, FHA lenders should be able to increase more revenue through sound business decisions than through the volume of loans originated.
New FHA Chief Risk Officer
First, the FHA Commissioner has created a new position at the agency. A Credit Risk Officer will oversee the risk management aspect of maintaining the two percent capital reserve ratio mandated by Congress. In 75 years, FHA administrators never saw this type of management as necessary. There have always been people with various risk management duties, but not in one centralized department. In the wake of the credit crisis, the new Chief Risk Officer will be able to more effectively coordinate the various risk management efforts made by all FHA programs at once.
2010 FHA Lender Policy Changes
Supervised mortgage lenders must now submit audited financial statements to the FHA. Most of these lenders already need to send those documents to other entities, so it won’t cost them much; and reviewing FHA lender financials will reassure the agency that these lenders have enough working capital to cover the potential needs of a well-run mortgage lender.
Procedures for documentation and credit approval have been standardized for refinance transactions, which will bring them in line with procedures already in place for new loan originations. The increased attention to a borrower’s ability to repay loans will help FHA lenders prevent borrowers from incurring more debt than they can afford.
The FHA is also taking a stronger stance on the independence of property appraisals, which may no longer be ordered directly by mortgage brokers or any other person employed by an FHA lender who works on commission. The agency will still allow the lender to select the independent appraiser, but reaffirming their position on this issue can more completely align the agency’s policy with the Home Valuation Code of Conduct.
The time period between an appraisal and its expiration date has been decreased to four months for all types of properties. Validity periods were previously dependent on whether the properties held existing buildings or new construction, and ranged from six to twelve months respectively.
Finally, when a borrower switches from one FHA lender to another in mid-application, the FHA will now limit the opportunity for a borrower to request a second appraisal from the new lender. Appraisal portability can reduce the time between application and closing when the borrower can get the first lender to simply transfer the first appraisal to the second lender’s file.
For more information, please visit the original FHA press release.
