Congress wants FHA to get tough with lendersby Peter Miller
Those who say Congress hasn’t done anything this year have not been reading the FHA Emergency Fiscal Solvency Act of 2012. This legislation, HR 4264, passed the House of Representatives with a vote of 402 to 7.
Given the divisive nature that has been seen on Capitol Hill during the past several years, you might wonder what could possibly get such an overwhelming majority to agree? Combine the FHA with the words “fiscal solvency” and you’ve got a winner.
What the legislation says
The legislation says, for example, that the maximum annual mortgage insurance premium would be allowed to rise from 1.55 percent to 2.05 percent for most FHA mortgages. It also says that the government will have the authority to go after lenders if they knew, or should have known, that there was a “serious or material” violation of the underwriting rules or in the case of fraud.
HUD says the legislation will help them “avoid or recoup losses for loans originated or underwritten by a mortgage lender which did not comply with FHA guidelines, as well as expand HUD’s ability to terminate the authority of poorly performing lenders to participate in FHA programs.”
The ability of HUD to get money back from lenders is nothing new. The FHA has always been able to ask for indemnification when lenders tossed loans into the system which allegedly do not meet FHA standards or were created by fraud.
Financial solvency and mortgage cheating
What’s interesting about the proposed legislation is that it ties the idea of financial solvency to mortgage cheating. Until this point, most of the complaints about the FHA concerned substantial reductions to its reserve fund, but never mentioned the role of lenders violations.
In other words, the FHA reserves would be larger if it didn’t have so many losses created by loans which never met its standards in the first place. Although nobody in Congress will say such a thing, the legislation actually puts more emphasis on lender compliance then in the past, something which should be good for mortgage rates. Through enforcement, risk is reduced.
Is this legislation a little too late?
It’s not entirely clear why the FHA needs such authority. For instance, the FHA has dumped more than 1,500 lenders who were once allowed to offer loans backed with its insurance.
Also, the FHA already has had settlements regarding alleged improper actions with lenders through its Civil Fraud unit, including $132.8 million from Flagstar Bank, $158.3 million from Citimortgage and $202 million with Deutsche Bank and its MortgageIT subsidiary. Then, of course, there was the $1 billion paid by Bank of America earlier this year in connection with alleged wrong-doing by Countrywide, the flawed mortgage originator bought several years ago by the bank.
Proper enforcement needed
The big question is how the expression “serious or material” will be defined.
A loose interpretation of the terms could render the proposed legislation toothless and less-enforceable than current regulations. Alternatively, if the expression is defined to tightly, lenders could be sued for minor clerical errors which really don’t impact mortgage performance.
The line has to be drawn carefully, and hopefully HUD will seek a level of enforcement which not only protects FHA standards but also represents common sense.