For many that don’t know, FHA was created by the National Housing Act of 1934. What people need to understand is that FHA doesn’t make the loans, but that they insure the mortgages for the lenders sake. The investors/lenders are the entities that make loans to borrowers. HUD, which stands for U.S. Department of Housing and Urban Development, is a government agency that was started in 1965 to help homeowners achieve that American Dream. They help borrowers with HUD approved programs, approves lenders to be FHA approved, and helps borrowers utilize the programs and guidelines set forth for FHA loans. Again, FHA is does not lend money. I only mention this because I get so many calls telling me that FHA will do this or do that, because it states it on the HUD website. The average consumer needs to understand that they set the guidelines for investors to follow, but it’s the investors that have specific overlays, meaning that they can add to the guidelines to make the loan more sell-able on Wall Street. A great example is that FHA has no specific credit scores, but most lenders won’t go below a 600 credit score. That is the investors choice, which can super-cede anything set by HUD for FHA loans.
The Assistant Secretary of Housing, Brian Montgomery, put out a new mortgagee letter just recently. FHA always puts out new mortgagee letters when there are changes in guidelines, but in this case, HUD wanted to make others aware of the seriousness of this issue. This mortgagee letter, ML 2009-12, is about Mortgagee Monitoring. The letter talks about FHA reactivating its Special Work Assessment Teams, which is called SWAT. SWAT is to conduct on-site reviews of the lenders whose loans are exhibiting signs of distress. In my opinion, this is a great sign that HUD is holding mortgagees accountable for their lending practices which will protect the FHA insurance fund which has been in trouble as of lately because of the many defaults and foreclosures.
Here is a great example of how much the usage of FHA loans has grown over the last 1 1/2 years because of the higher standards of conventional loans and because of the demise of the subprime loans. Just in New Jersey alone, in 2008, there were about an additional 500 new approved FHA underwriters. This number went from around 300 to 800. Just in the last year, there have been more 1st payment defaults, foreclosures, and certain detections of fraud. It’s been shown that many of these new underwriters are missing specific issues or are being more lienent on their approvals. Hence why HUD came out with this new mortgagee letter, letting lenders and underwriters know that they are reviewing certain practices. So here is a list of what HUD expects each lender to review and to insure a good loan : (this list has come directly from mortgagee letter 2009-12)
- implements and maintains a comprehensive quality control plan,
- reviews all loans with early payment defaults;
- does not engage in false or misrepresentative advertising; (I love this one and this should have taken place decades ago)
- fully documents the stability and amount of borrower(s) income; and,
- does not charge excessive and unallowable fees to the borrower.
Conclusion : Overall, the Department of HUD would expect each mortgagee to originate a mortgage with the same care and underwriting the FHA loanjust as it would for a loan in which the lender would be entirely dependent on the property as security to protect it’s investment. In basic terms, that the lender would care for the loan as if it were it’s own child for the next 20 years. And if a mortgagee, the lender that approves the mortgage, fails to comply with HUD’s policies, then HUD would take appropriate action. Such actions would be to suspend the lender from originating FHA loans or to actually terminate that lender’s DE license. (delegated underwriting license)
In regards to my 16 years in the mortgage industry, I think it’s about time that we crack down on those that fail the integrity of lending and the lending quidelines. It’s one thing to try and to make a loan work, but another to ignore specific guidelines and or to commit fraud.
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!
Copyright © 2009 by Jeff Belonger