The U.S. Department of Housing and Urban Development (HUD) has 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. The proposed rule would require all new and existing lenders with the ability to insure mortgages on HUD's behalf to meet stricter performance standards to gain and maintain their approval status.
Specifically, lenders may be required to indemnify HUD if they fail to verify and analyze the creditworthiness, income or employment of the borrower or fail to verify the source of assets brought by the borrower for payment of the required down-payment and/or closing costs.
Failure to address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property or failure to ensure that the property appraisal satisfies FHA appraisal requirements may also lead to indemnification.
‘It's important that our expectations are crystal clear,’ says FHA Commissioner David H. Stevens. ‘We need to clarify which circumstances we'll require indemnification and the level of loan performance we expect lenders to maintain.’
To gain and preserve delegated lender insurance authority under the proposed rule, lenders would have to maintain a claim and default rate at or below 150% for the previous two years. This standard would apply to the state or states where the lender does business, rather than a national default/claim average.
The present regulation defines an acceptable rate as at or below 150% of either the national average rate for all insured mortgages or, if the mortgagee operates in a single state, the average rate for insured mortgages in the state. The FHA says the current regulation may make it easier for a single-state lender to meet the acceptable standard if that lender operates in a state that has a high default rate.