FHA Holds Lenders Accountable For Brokers Underwriting
One of the government’s largest agencies that insures or backs loans has begun to implement new governing rules that require lenders to not only supervise independent mortgage brokers underwriting, but it also holds lenders accountable for faulty or fraudulent information supplied by brokers. If one of these FHA backed loans goes bad lenders can now be held liable for the losses.
Currently the Federal Housing Administration is having a tough time keeping up with the amount of ever increasing independent mortgage brokers. In the past couple of years mortgage brokers have increased their numbers exponentially. The FHA has had a difficult time regulating the mass of brokers. Over the past 2 years the amount of FHA approved mortgage brokers has increased from 5,759 to 9,043. It is the hope of the FHA that these new guidelines will free them from massive regulation and shift more responsibility on to the lenders.
The Federal Housing Administration did not play a role in the sub-prime lending boom. During the subprime lending era when many other financial institutions lowered their lending standards, the government agency kept its lending standards the same. This steady hand not only shielded them from a lot of the housing market crash fall out, it also lured lenders and brokers looking for backing on hard to finalize loans. During this time their market share increased to one third of the mortgage market.
These new changes are took affect May 20th. The changes will end the process of the FHA having to certify independent mortgage brokers. It will also elevate the man power required to track individual performance of these mortgage brokers. The guidelines shift supervision and responsibility back to lenders. Some lenders seem to agree with the FHA’s decision, while others say that the new policies open lenders up to additional legal vulnerabilities. In addition to requiring broker supervision by lenders, the FHA has also requested that brokers increase their net worth from $250,000 to $1 million. This will push out some of the smaller brokers where plenty of blame levied from sub-prime origination.
They are also asking congress to give them supplementary authority to enable them to recoup losses due to faulty or poorly underwritten loans. Currently the organization has this authority over 71% of the loans that they back. These new indemnification policies would allow the agency to pursue the remaining 1,400 lenders or 29%.