FHA Updates

The FHA Commissioner, Dave Stevens, opened up the conference in Atlanta. He outlined his three goals. They are:

1) Support the Obama Administration’s foreclosure avoidance programs
2) Maintaining FHA’s financial soundness
3) Technology improvements

In response to a question on risk-based pricing, Dave Stevens said FHA has no plans to implement risk-based pricing.

The highlights of the conference are:

1. Condominiums
The implementation of the new condominium rules have been delayed until November 2nd.

• Recertification of Project Approvals

FHA will not be implementing recertification requirement until October 2010. If the project was FHA approved prior to 10/1/08, the lender can continue to certify that the project is FHA approved by using Attachment C of ML 09-16 until 9/30/2010. If the project is not reprocessed under the procedures in ML 09-16 by 9/30/2010, then the project will be removed from the FHA approved list starting 10/1/2010.

2. Miscellaneous Items

• HUD is reconsidering second appraisal requirement for properties with loan amounts above $417,000.
• HUD will soon issue a Mortgagee Letter eliminating the option to obtain a 10 year warranty in order to get a high ratio loan.
• Credit Watch for wholesalers will likely be implemented by January 1, 2010.
• FAQs will be published soon on the three new appraisal MLs- 2009-28, 2009-29 and 2009-30.
• FHA also said is not permissible to have staff use FHA Connection from outside of the United States.

I. Assessment of FHA’s Financial Condition and Future Direction

• FHA’s Financial Condition
o FHA Commissioner has said FHA has sufficient reserves and will not require taxpayer assistance
• FHA’s Changing Philosophy
o For the first-time ever, FHA has leadership with industry experience
o FHA is expected to revamp its risk management and business processes
o FHA will move toward industry underwriting standards
• FHA’s New Credit Policies
o FHA has published new appraisal independence requirements and tightened rules on streamline refinances transactions
o Supervised mortgagees (financial institutions) will be required to submit audited financial statements starting in January 2010
o Proposed mortgagee eligibility changes could have significant impact (See below)
• RESPA FAQs

We believe the FHA proposal to stop approving loan correspondents in the FHA program is arguably the most significant announced change. In the press release ,FHA said “Correspondents (mortgage brokers) will continue to be able to originate FHA‐insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility.” In other words, FHA Direct Endorsement lenders will be able to underwrite and close loans that were obtained from non-approved mortgage brokers, community banks, etc. Of course, the Direct Endorsement lender will be responsible for the origination process on these loans. In effect, these loans are likely to be treated like retail loans from a liability perspective.

In light of Dave Stevens’ background (a former Freddie Mac executive), it appears likely that FHA will be adopting some Freddie Mac business principles. One of the GSE guidelines, of course, is to hold the seller-servicer responsible for the actions of the originator. The FHA proposal, in effect, would be substituting the Direct Endorsement lender for the GSE seller-servicer. We would expect the DE lender would have to underwrite and close the loan in its name.

FHA’s primary reasons for taking this action are: 1) FHA does not have the resources to conduct a thorough review of all applicants and their current process for mortgage brokers is cursory at best and 2) the minimal net worth ($63,000) provided little protection for the Government’s risk in the event of an indemnification request.

The implications of this change are far-reaching in the FHA program. Once you permit FHA approved lenders to take applications from any source that meets State and other Federal guidelines (e.g. RESPA), it could render FHA’s other lender approval requirements outdated and unnecessary (i.e. branch lending areas, direct lending, principal-agent restrictions, etc.). We expect FHA will be reengineering its lender approval and monitoring process.

Timeline for Implementation

To implement this change, FHA must go through the rulemaking process. We expect the proposed rule to be published in the next several weeks and there will likely be a 30 day period comment period. While changes are possible as a result of comments, the apparent goal is to have a final rule published by the end of the year so current loan correspondents will not have to be recertified in 2010.