The Federal Housing Administration’s Mortgagee Review Board (MRB) has announced a settlement agreement with a Massachusetts mortgage lender for failing to fully verify whether borrowers could sustain their mortgage payments prior to refinancing their loans.
Among the alleged violations, the MRB claimed First American Mortgage Trust (FAMT) of Brookline, Massachusetts refinanced mortgage loans for borrowers with serious credit delinquencies without properly analyzing the households’ ability to manage credit. As part of the settlement, FAMT agrees to pay $72,500, reimburse FHA for past insurance claims, and to indemnify FHA’s insurance fund for any claims to be paid on five mortgages should they default with the next 60 months.
“FHA-approved lenders are obliged to apply our underwriting standards, not only to protect our insurance fund, but to make certain families can sustain their mortgages,” said Acting FHA Commissioner Bob Ryan. “Due diligence is at the root of mortgage lending protecting lenders, the FHA, and certainly homeowners from the prospect of foreclosure.”
FHA’s Mortgagee Review Board sanctions FHA-approved lenders for violations of the agency’s program requirements. For serious violations, the Board can withdraw a lender’s FHA approval so that the lender cannot participate in FHA programs. In less serious cases, the Board enters into settlement agreements with lenders to bring them into compliance. The Board can also impose civil money penalties, probation, suspension, and issue letters of reprimand. This fiscal year alone, the MRB took 19 administrative sanctions against lenders, including reprimands, probations, suspensions, withdrawals of approval, and civil money penalties.
Last October, the U.S. Department of Housing and Urban Development (HUD) proposed new regulations to strengthen its authority to force certain lenders to indemnify or reimburse the Federal Housing Administration (FHA) for insurance claims paid on mortgages that are found not to meet the agency’s guidelines. In addition, HUD’s proposed rule would require all new and existing lenders with the ability to insure mortgages on HUD’s behalf (“Lender Insurance” mortgagee) to meet stricter performance standards to gain and maintain their approval status.
For those lenders with special authority to insure mortgage loans on FHA’s behalf, HUD seeks to force indemnification for ‘serious and material’ violations of FHA origination requirements such that the mortgage never should have been endorsed by the mortgagee in the first place just as FHA would not have insured the mortgage on its own.
Specifically, these lenders may be required to indemnify HUD if they failed to: (1) verify and analyze the creditworthiness, income, and/or employment of the borrower; (2) verify the source of assets brought by the borrower for payment of the required downpayment and/or closing costs; (3) address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property; or (4) ensure that the property appraisal satisfies FHA appraisal requirements. HUD may seek indemnification irrespective of whether the violation caused the mortgage default.
The proposed rule will also require those mortgagees with delegated lender insurance authority to continually maintain an acceptable claim and default rate, both to gain this special lender status as well as to preserve it. HUD proposes that all new unconditional direct endorsement lenders who have the authority to self-insure mortgages must demonstrate a default and claim rate at or below 150 percent for the previous two years. This standard would apply to the state/states where the lender does business, rather than a national default/claim average.
Finally, the FHA will consider the two-year default and claim performance of either entity in the case of acquisition or merger without requiring these entities to seek a waiver. FHA, at its own discretion (without any judicial or administrative action) also clarifies that it has the authority to immediately withdraw a lender’s ability to self-insure mortgage loans.