The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the October edition of the Obama Administration’sHousing Scorecard.  The latest housing figures show continued signs of stabilization in house prices and high home affordability due in part to record low interest rates. The housing scorecard is a comprehensive report on the nation’s housing market..

“Over the last 21 months, the Obama Administration’s swift action in the housing market has kept millions of families in their homes and provided responsible borrowers with incentives to refinance or to become a homeowner,” said HUD Assistant Secretary Raphael Bostic. “But, with many unavoidable foreclosures still in the pipeline, it’s clear that we have a hard road ahead. That’s why we’re focused on successfully implementing the programs we’ve put in place – such as additional assistance on refinancing and helping unemployed homeowners stay in their homes – and ensuring that help is available to homeowners as soon as possible.”

“HAMP is not only an important part of the Administration’s efforts to stabilize the housing market, it has also redefined the loan modification standard for the mortgage industry overall. That has led to more than 3.5 million modification arrangements directly benefitting families in communities across the country still healing from the crisis,” said acting Assistant Secretary for Financial Stability Tim Massad. “Early data shows that well beyond the trial phase, the majority of homeowners are maintaining their HAMP modifications,  reflecting  the rigorous standards the program uses  to provide assistance to responsible homeowners.”

The October Housing Scorecard features key data on the health of the housing market including:

• Families continued to benefit from the lowest rates in history on 30-year fixed mortgages. Since April of 2009, record low interest rates have helped more than 7.1 million homeowners to refinance, resulting in more stable home prices and $12.7 billion in total borrower savings.
• As expected with the expiration of the Homebuyer Tax Credit, new and existing home sales remained below levels seen in the first half of 2010. At the same time, home prices remained level in the past year after 33 straight months of decline and homeowners added $95 billion in home equity in the second quarter.
• More than 3.52 million modification arrangements were started between April 2009 and the end of August 2010 —nearly triple the number of foreclosure completions during that time. These included more than 1.3 million trial Home Affordable Modification Program (HAMP) modification starts, more than 510,000 Federal Housing Administration (FHA) loss mitigation and early delinquency interventions, and more than 1.6 million proprietary modifications under HOPE Now. While some homeowners may have received help from more than one program, the number of agreements offered nearly tripled foreclosure completions for the same period (1.3 million).
• At nine months, almost 90 percent of homeowners remain in their permanent HAMP modification, with 11 percent defaulted. Early data indicate that HAMP permanent modifications are performing well over time, with lower delinquency rates than those reported by the industry at large.  At nine months, less than 16 percent of permanent modifications are 60+ days delinquent.

Data in the scorecard also show that the recovery in the housing market continues to remain fragile. For example, foreclosure completions continue to move upward and a large supply of homes are being held off the market. While the recovery will take place over time, the Administration remains committed to its efforts to prevent avoidable foreclosures and stabilize the housing market.

The following is a message from David H. Stevens, Commissioner of the Federal Housing Administration (FHA) on the state of the FHA and the Administration’s latest initiatives: As FHA has now moved into a new fiscal year, I want to take the opportunity to update you on several FHA policy initiatives that went into effect earlier this month (Oct. 4). These include a new product option for FHA’s Home Equity Conversion Mortgage (HECM), changes to our Mortgage Insurance Premiums (MIPs), and new credit score and downpayment requirements for FHA borrowers.

In addition, I want to provide you with details of a proposed rule on lender indemnification that was published on Oct. 8. Each of these measures is designed to strengthen our risk management practices as we continue to work to increase our capital reserves.

HECM Saver
HUD has just introduced a major new FHA insurance product for reverse mortgages. HECM Saver gives seniors a new option for accessing their home’s equity to pay for health care costs, home repairs and other needs. Despite the popularity of the HECM loan product, we have noted concerns that some senior citizens find that the upfront fees are too high for them. In response, we created this new product which will provide seniors with another reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option.
The new product enables seniors to borrow a smaller amount than would be available with a HECM Standard loan. This option will be available for all HECM case numbers assigned on or after Oct. 4, 2010.

As described in Mortgagee Letter 2010-34, HECM Saver will have an upfront premium of only .01 percent of the property’s value. This provides the borrower with significant savings in comparison to HECM Standard’s two percent upfront premium. Under HECM Saver, the principal limit, or amount of money available to a borrower, is lower than under HECM Standard. Borrowers will receive approximately 10 to 18 percent less proceeds under the HECM Saver option than they would receive under HECM Standard, which lowers the risk to the FHA insurance fund. The annual MIP for both HECM products is 1.25 percent of the outstanding loan balance.

MIP changes
Legislation signed by President Obama on Aug. 12 gave FHA the flexibility to increase the annual premium on FHA single family mortgages up to a maximum of 1.50 or 1.55 percent of the remaining insured principal balance, depending on the loan’s initial loan-to-value ratio.
Beginning October 4, the annual premium for FHA Borrowers with a loan-to-value ratio of 95 percent or higher is 90 basis points. Borrowers who have a loan-to-value less than 95 percent will pay an annual premium of 85 basis points.

Simultaneously with the increase in the annual premium, we have reduced the upfront premium by 125 basis points, from 2.25 percent to one percent. This reduces the barriers to consumers in purchasing a home because the annual premium is paid over the life of the loan instead of at closing. Thus, the new premium structure should help FHA increase the capital ratio in the MMI Fund without disrupting the housing market. For details on the new MIP structure, see Mortgagee Letter 2010-28.

We are confident this new premium structure is sound policy, more in line with private mortgage insurers’ pricing, and will facilitate the return of private capital to the mortgage market. This change is estimated to yield approximately $300 million per month of additional income for the MMI Fund.

Credit score and downpayment requirements
Also effective Oct. 4, FHA introduced a two-tiered downpayment requirement based on the credit scores of new borrowers. To qualify for FHA’s 3.5 percent downpayment program, new borrowers must have a minimum credit score of 580. Borrowers with credit scores between 500 and 579 are now required to make a downpayment of at least 10 percent. Those borrowers with credit scores less than 500 are no longer qualified to obtain an FHA-insured mortgage.

These new requirements should help strengthen the MMI Fund by both reducing the claim rate on new loans and decreasing the losses experienced as a result of those claims. These changes will help FHA manage its risk while continuing to provide access to homeownership opportunities for borrowers who have historically performed well. For details, read Mortgagee Letter 2010-29.

New proposed rule
On Oct. 8, HUD published a proposed rule for comment in the Federal Register that would strengthen its authority to force certain lenders to indemnify FHA for insurance claims paid on mortgages that are found not to meet the agency’s guidelines. This rule is one of the initiatives announced earlier this year as part of FHA’s increased focus on risk management.
HUD’s proposed rule would require all new and existing lenders with the authority to insure mortgages on FHA’s behalf (Lender Insurance or “LI” lenders) to meet stricter performance standards to gain and maintain their approval status.

The proposed rule would create a regulatory framework and codify the legal authority FHA currently has under the National Housing Act. It clarifies the circumstances under which we will require indemnification and the level of loan performance we expect lenders to maintain.
For LI lenders, HUD seeks to force indemnification for violations of FHA origination requirements that are ‘serious and material’ to the extent that the mortgage never should have been endorsed by the lender 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 down payment 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.

Tightening performance standards
The proposed rule will also require LI lenders to continually maintain an acceptable claim and default rate, both to gain and preserve this special lender status. We are proposing that for initial and continuing approval to self-insure mortgages, unconditional direct endorsement lenders 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.

The present regulation defines an acceptable claim and default rate as at or below 150 percent of either:

(1) The national average rate for all insured mortgages; or

(2) If the mortgagee operates in a single state, the average rate for insured mortgages in the state.

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. In contrast, a lender would be disadvantaged by having its claim and default rate compared to the national average if it operates in states with comparatively high default rates, even if the lender is in full compliance with FHA requirements and otherwise eligible for “Lender Insurance” approval.

The proposed methodology will more accurately reflect lender performance by evaluating each lender based on its actual area of operations. Also, FHA will continually monitor lender performance rather than conduct an annual review of each Lender Insurance mortgagee.
In addition, FHA will consider the two-year default and claim performance of either entity in the case of an acquisition or merger without requiring these entities to seek a waiver.
The rule also clarifies that FHA, at its own discretion, without any judicial or administrative action, has the authority to immediately withdraw a lender’s ability to self-insure mortgage loans. The proposed rule has a 60-day public comment period that runs through Dec. 7.

In closing, I want to assure you that we are constantly working to maintain FHA’s sound financial footing so FHA can continue to provide access to credit while meeting the unprecedented demands of the housing market. I will keep you posted as we move forward.

For more information, visit www.hud.gov.

“There’s a reflection in the media that we aren’t holding ourselves accountable enough,” said David H. Stevens, commissioner of the FHA, noting that the recent news of flaws in some banks’ foreclosure processing methods is adding to the problem. Read more on Fannie, Freddie urge lenders to fix ‘robo-signer’ controversy.

In the public’s eye, the mortgage industry bears a burden for lending practices that contributed to the housing crisis, he said. And the crisis now may end up creating a generation of people more apt to rent.

Scaring off echo boomers, the children of the baby boomers, from buying a home would have a large impact on markets to come, he said. Stevens cited a report by Harvard University’s Joint Center for Housing Studies that found the housing market’s rebound depends on that generation, who have watched the real-estate market crumble “with shock and awe” and now have reservations about whether they should buy a home.

Stevens defended the administration’s Home Affordable Modification Program, which he said has provided the blueprint for banks’ own modification programs. HAMP and non-HAMP modification programs have produced more than 3.5 million mortgage modification arrangements, which Stevens said is “more than double the total number of foreclosures in the same time period.”Read more on watchdog criticizes loan-modification program.

With mid-term elections approaching, he defended the Obama administration, pointing out the dire state of the housing markets and the economy when the president took office, with falling home prices and rising unemployment. The administration’s response to the country’s housing problems included stabilization of Freddie Mac and Fannie Mae, the two mortgage-buying giants, and efforts aimed at keeping mortgage rates low, Stevens said. Today, the steep drop in home prices has “clearly stalled,” he added.

Read more on home prices fall in August. Read more on existing-home sales rise 10% in September.

Now, even as the industry is dealing with new rules and regulations aimed at improving consumer protections, it also needs to ensure consumers have access to the credit they need, he said.

Banks need to be thoughtful about making sure that those who can afford a home are able to get credit, using responsible underwriting, he said. Even though FHA recently introduced a credit-score requirement for mortgages it insures, he cautioned bankers from making decisions based on solely on credit scores, which don’t always reflect a borrower’s complete financial picture.

“We won’t help communities to recover if we limit access to a very top tier,” he said.

To the extent that there’s anything to be encouraged about by the Administration’s response to the foreclosure mess, it’s that Shaun Donovan publicly stated that loan servicers were violating FHA standards by failing to offer affordable modifications to borrowers before foreclosing on them. That would be a sea change from the current position, which through HAMP basically puts the modifications in the hands of the servicers. Some borrowers who have been through HAMP and were denied have filed suit against many of these servicers, and the banks’ explanation for this is very telling.

The banks’ broadest legal counterargument against unhappy HAMPers’ lawsuits has been that homeowners can’t sue to enforce the Servicer Participation Agreements between mortgage servicers and the Treasury Department, which administers HAMP. It’s an argument to which judges have been receptive. But servicers are now also responding to legal arguments that they’ve acted in bad faith. When homeowners argue that they should be granted permanent modifications because they’ve successfully made their trial payments, banks say homeowners actually don’t know what they’re talking about.

In motions to dismiss suits seeking class-action status in Massachusetts and Arizona, for instance, JPMorgan Chase and Bank of America first point out that the Treasury Department has made a lot of changes to HAMP, which Bank of America calls “a constantly evolving new federal program” with near-monthly supplemental directives from the government [...]

“Not all mortgage loans are eligible for HAMP, and a participating servicer is not required to modify every HAMP-eligible loan,” Bank of America’s lawyers argued in August in response to a lawsuit in Arizona. “If borrower eligibility is satisfied, the servicer is obligated to consider the borrower for a HAMP modifiation, assuming it is not precluded from doing so by its other contractual arrangements or investor requirements.”

We’ll see how that holds up in court. But one important thing to explain: regardless of HAMP, it’s not only standard practice in the industry going back decades, but requirements under servicer agreements to do whatever possible to avoid foreclosure. It’s just not optional. There should never, ever be the amounts of foreclosures that we’re seeing. “Because the first rule of mortgage lending is you don’t foreclose. And the second rule of mortgage lending is you don’t foreclose,” as Mike Konczal said. The difference here is that in the topsy-turvy world of modern mortgage finance, it’s become more lucrative for the servicers to foreclose than to modify the loan. But that’s not true for the economy, or even for the investors who actually (we think) own the loans; they’d much rather see modification than foreclosure.

Not only is there no shame in a modification; it should be the standard practice of the industry, as it always has been. Foreclosures are costly, disruptive, and very damaging. They should be avoided. And the lenders not only have every reason to offer those modifications, they have a moral imperative to do so, given the predatory lending tactics, lies and scams during origination, and rush to give out loans that caused the housing bubble, its eventual deflation, and the mass problems we are now facing.

Lenders are moving in a better direction with this, but the HUD Secretary outlined mass variation among servicers. That needs to stop, and it’s an excellent place for him to get involved.

FHA Commissioner David Stevens sent out the following note outlining recent FHA updates and newly proposed rules.

HERE is the actual release.

———————-
As FHA has now moved into a new fiscal year, I want to take the opportunity to update you on several FHA policy initiatives that went into effect earlier this month (October 4). These include a new product option for FHA’s Home Equity Conversion Mortgage (HECM), changes to our Mortgage Insurance Premiums (MIPs), and new credit score and down payment requirements for FHA borrowers.

In addition, I want to provide you with details of a proposed rule on lender indemnification that was published on October 8. Each of these measures is designed to strengthen our risk management practices as we continue to work to increase our capital reserves.

HECM Saver
HUD has just introduced a major new FHA insurance product for reverse mortgages. HECM Saver gives seniors a new option for accessing their home’s equity to pay for health care costs, home repairs and other needs. Despite the popularity of the HECM loan product, we have noted concerns that some senior citizens find that the upfront fees are too high for them. In response, we created this new product which will provide seniors with another reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option.

The new product enables seniors to borrow a smaller amount than would be available with a HECM Standard loan. This option will be available for all HECM case numbers assigned on or after October 4, 2010.

As described in Mortgagee Letter 2010-34, HECM Saver will have an upfront premium of only .01 percent of the property’s value. This provides the borrower with significant savings in comparison to HECM Standard’s two percent upfront premium. Under HECM Saver, the principal limit, or amount of money available to a borrower, is lower than under HECM Standard. Borrowers will receive approximately 10 to 18 percent less proceeds under the HECM Saver option than they would receive under HECM Standard, which lowers the risk to the FHA insurance fund.

The annual MIP for both HECM products is 1.25 percent of the outstanding loan balance.

MIP Changes
Legislation signed by President Obama on August 12 gave FHA the flexibility to increase the annual premium on FHA single family mortgages up to a maximum of 1.50 or 1.55 percent of the remaining insured principal balance, depending on the loan’s initial loan-to-value ratio.

Beginning October 4, the annual premium for FHA Borrowers with a loan-to-value ratio of 95 percent or higher is 90 basis points. Borrowers who have a loan-to-value less than 95 percent will pay an annual premium of 85 basis points.

Simultaneously with the increase in the annual premium, we have reduced the upfront premium by 125 basis points, from 2.25 percent to one percent. This reduces the barriers to consumers in purchasing a home because the annual premium is paid over the life of the loan instead of at closing. Thus, the new premium structure should help FHA increase the capital ratio in the MMI Fund without disrupting the housing market. For details on the new MIP structure, see Mortgagee Letter 2010-28.

We are confident this new premium structure is sound policy, more in line with private mortgage insurers’ pricing, and will facilitate the return of private capital to the mortgage market. This change is estimated to yield approximately $300 million per month of additional income for the MMI Fund.

Credit Score and Down Payment Requirements
Also effective October 4, FHA introduced a two-tiered down payment requirement based on the credit scores of new borrowers. To qualify for FHA’s 3.5 percent down payment program, new borrowers must have a minimum credit score of 580. Borrowers with credit scores between 500 and 579 are now required to make a down payment of at least 10 percent. Those borrowers with credit scores less than 500 are no longer qualified to obtain an FHA-insured mortgage.

These new requirements should help strengthen the MMI Fund by both reducing the claim rate on new loans and decreasing the losses experienced as a result of those claims. These changes will help FHA manage its risk while continuing to provide access to homeownership opportunities for borrowers who have historically performed well.

For details, read Mortgagee Letter 2010-29.

New Proposed Rule
On October 8, HUD published a proposed rule for comment in the Federal Register that would strengthen its authority to force certain lenders to indemnify FHA for insurance claims paid on mortgages that are found not to meet the agency’s guidelines.

This rule is one of the initiatives announced earlier this year as part of FHA’s increased focus on risk management.

HUD’s proposed rule would require all new and existing lenders with the authority to insure mortgages on FHA’s behalf (Lender Insurance or “LI” lenders) to meet stricter performance standards to gain and maintain their approval status.

The proposed rule would create a regulatory framework and codify the legal authority FHA currently has under the National Housing Act. It clarifies the circumstances under which we will require indemnification and the level of loan performance we expect lenders to maintain.

For LI lenders, HUD seeks to force indemnification for violations of FHA origination requirements that are ‘serious and material’ to the extent that the mortgage never should have been endorsed by the lender 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 down payment 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.

Tightening Performance Standards
The proposed rule will also require LI lenders to continually maintain an acceptable claim and default rate, both to gain and preserve this special lender status. We are proposing that for initial and continuing approval to self-insure mortgages, unconditional direct endorsement lenders 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.

The present regulation defines an acceptable claim and default rate as at or below 150 percent of either: (1) the national average rate for all insured mortgages; or (2) if the mortgagee operates in a single state, the average rate for insured mortgages in the state.

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. In contrast, a lender would be disadvantaged by having its claim and default rate compared to the national average if it operates in states with comparatively high default rates, even if the lender is in full compliance with FHA requirements and otherwise eligible for “Lender Insurance” approval.

The proposed methodology will more accurately reflect lender performance by evaluating each lender based on its actual area of operations. Also, FHA will continually monitor lender performance rather than conduct an annual review of each Lender Insurance mortgagee.

In addition, FHA will consider the two-year default and claim performance of either entity in the case of an acquisition or merger without requiring these entities to seek a waiver.
The rule also clarifies that FHA, at its own discretion, without any judicial or administrative action, has the authority to immediately withdraw a lender’s ability to self-insure mortgage loans. The proposed rule has a 60-day public comment period that runs through December 7.

In closing, I want to assure you that we are constantly working to maintain FHA’s sound financial footing so FHA can continue to provide access to credit while meeting the unprecedented demands of the housing market. I will keep you posted as we move forward.

Mortgage refinancing opportunities may be available for certain homeowners who have seen their property’s value decrease and are now in a situation where they have negative equity in their home. These underwater homeowners have been in situations where they are finding it difficult to meet their monthly mortgage payment as a result of the type of mortgage attached to their underwater home.

Yet, programs like the FHA short refinance program and the Home Affordable Refinance Program have been implemented as a way to offer homeowners with an underwater mortgage the chance to obtain a more affordable payment through refinancing.

Traditional refinancing on underwater home loans is usually unavailable due to the fact that, again, a homeowner has negative equity. Yet, solutions through these underwater refinancing programs have allowed certain individuals to refinance their mortgage through specific underwater refinancing opportunities and, as a result, find a fixed rate mortgage which may be more affordable.

There is concern though as some homeowners have grown so frustrated with their mortgage situation that they have simply strategically defaulted on their underwater mortgage and walked away. This has been the case for homeowners who have seen severe decreases in their property’s value or who may be denied assistance through underwater refinancing plans. While there have also been proposals for principal reductions, many banks have said that they are unwilling to use this form of underwater assistance on a large scale.

However, in the coming months it’s hoped that more homeowners will find opportunities to refinance their underwater mortgage if a situation is present where a homeowner is having difficulty making payments and may default without aid. While not all homeowners have been successful in finding solutions to their underwater mortgage, with national and state plans available to assist underwater homeowners, there are now more opportunities which can help homeowners with negative equity in their home.

WHEN THE FEDERAL Housing Administration (FHA) changes its multifamily programs—some of which have remained untouched for 40 years—the agency doesn’t fool around.

As expected, in July, the FHA tweaked underwriting standards for its new construction and refinancing programs, making it tougher for market-rate deals to pencil out. But the agency also unveiled a clearinghouse of other risk-management efforts that will require more documentation from borrowers, more analysis from lenders, and ultimately more steps in the process of securing a loan.

“The changes are going to have the intended consequence of making it harder, and slightly less palatable, for those looking to develop market-rate housing to use HUD,” says Nick Gesue, a director at Columbus, Ohio-based FHA lender Lancaster Pollard.

The changes are designed to clear out the FHA’s congested pipeline of marketrate deals, to better sort the wheat from the chaff. By delegating additional responsibility to lenders, the agency hopes to make the process more efficient. But with so many changes unveiled at once, many in the industry fear that the new requirements may have the opposite effect.

“It’s short-term pain for long-term gain. There will be a real learning curve for the lenders and for HUD staff, but is it a sixmonth or three-year learning curve?” asks Phil Melton, who leads the FHA division of Charlotte, N.C.-based Grandbridge Real Estate Capital. “That will make a huge difference as to whether the FHA continues to be a big player, or whether they will become a lender of last resort again.”

It’s not yet clear how all of these enacted and proposed changes will affect borrowers, though intuitively, the process seems more restrictive and time consuming than in the past. The bottom line is that the agency was understaffed before these changes, and if efficiencies are to be realized, the FHA has to step up internally. “They need more and better staff,” says Doug Moritz, associate vice president of multifamily at the Washington, D.C.-based Mortgage Bankers Association (MBA).

Here’s an overview of the top changes to the FHA’s multifamily programs—and the extra hurdles you can expect.

1. Extra Steps

Two of the biggest changes include a “new concept planning meeting” between lender and HUD staff (which was already enacted in July), and a proposed new loan committee within HUD that the agency hopes to enact by the end of the year.

For the new concept planning meetings, lenders will have to meet with FHA staff to do an early review of larger marketrate 221(d)(4) deals before submitting a pre-application. Basically, lenders must assemble a long list of documentation, which will then be reviewed by HUD.

The new concept planning meeting “will put extra burden on HUD staff who are already burdened, and that’s a concern,” Gesue says. “This is almost like a pre-pre-app—you may have to spend a month going back and forth on this initial concept meeting.”

The FHA also hopes to roll out an internal loan committee that would align field offices with headquarters to review particularly complex transactions.

The big question is whether the agency has the staff to accommodate these changes. While the FHA has a hiring goal for its single-family side, the agency has been under a casual hiring freeze for its multifamily divisions over the past 18 months.

2. Mortgage Credit Review

A new mortgage credit review process is also in place, and all company principals will now be heavily scrutinized. Lenders will perform financial reviews on all of a borrowing entity’s principals, analyzing their creditworthiness and schedule of maturing loans, and ultimately delivering a financing plan for any projected shortfalls.

FHA lenders concede that this will likely add to the overall deal cycle time, especially for larger organizations with many principals, or smaller organizations with very experienced principals. What’s more, the FHA expanded its defi- nition of a principal. Now, each member of a company’s board is considered a principal and, as a result, the accompanying credit reviews will take a little longer now.

3. Changes to 221, 223 Loans

Occupancy standards for 223(f) loans are now a little tougher. Market-rate deals can only be underwritten to a 93 percent occupancy ceiling, down from the previous 95 percent, even if that apartment building has been 99 percent occupied for years.

The FHA will now also require 223(f ) borrowers to have three years of their tax returns and property financial statements reviewed by a CPA. In the past, a borrower could just print out their data and certify it.

Another new requirement mandates a separate market study—beyond the study in the appraisal—for 223(f ) deals in volatile or declining markets. This requirement raises questions as to who determines the need for the study, what exactly makes a market “volatile,” and who has the final say.

Also, for new construction or substantial rehab deals, the FHA now requires a tighter absorption period. In the past, 221(d)(4) developments had two years to meet their occupancy goals—now just 18 months. Lenders feel this could hurt deals in solid secondary markets where lease-ups may proceed at a slower pace than the biggest metros.

4. License to Loan

The FHA is working on additional multifamily changes that it hopes to enact by the end of the year. The biggest proposal surrounds heightened standards for FHA lenders and underwriters.

Currently, any FHA lender can make any FHA loan—new construction, refi- nancing, market-rate, affordable. But under a proposed change, the FHA would create tiered licenses—some lenders will be able to do new construction deals, for instance, and some will not.

The FHA would assess each lender’s recent history to determine the level of license. But many argue that the time frame— the past three years—does not provide a representative sample given the state of the multifamily market during that period.

The MBA recently conducted a study with four of its FHA lenders to see how many people in those organizations would be qualified to make all FHA loans. The results were troubling: Of 41 employees among four different companies, only two were qualified to make all types of FHA loans.

WASHINGTON – The U.S. Department of Housing and Urban Development today 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.

Last January, FHA announced a series of policy changes to address risk and strengthen the financial position of its insurance fund. Today’s announcement will create a regulatory framework and codify the legal authority FHA currently has under the National Housing Act. To read the full text of FHA’s proposed rule, visit HUD’s website.

“It’s important that our expectations are crystal clear,” said 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.”

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.

While HUD will seek indemnification in cases of fraud or misrepresentation at any time, the Department intends to codify a ‘reasonable time period’ for requiring indemnification in cases where the mortgagee failed to meet FHA requirements. For those cases not involving fraud or misrepresentation, it has been HUD’s long-standing practice of requiring indemnification “within five years from the date of mortgage insurance endorsement.” The date of endorsement is a fixed date, and therefore has the benefit of being known to both HUD and the lenders with the authority to self insure mortgages. HUD believes five years is a reasonable “seasoning” period for a particular mortgage loan to either perform or go into default and for the Department to ascertain whether origination errors were made. In addition, this five-year period is not considered a burden to lenders who might otherwise face the possibility of indemnifying insurance claims made on long-ago endorsed mortgage loans.

Tightening Performance Standards

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.

The present regulation defines an acceptable claim and default as at or below 150 percent of either: (1) the national average rate for all insured mortgages; or (2) if the mortgagee operates in a single state, the average rate for insured mortgages in the state.

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. In contrast, a mortgagee would be disadvantaged by having its claim and default rate compared to the national average if the mortgagee operates in states with comparatively high default rates, even if the mortgagee is in full compliance with FHA requirements and otherwise eligible for “Lender Insurance” approval. HUD believes the proposed methodology will more accurately reflect mortgagee performance by evaluating each mortgagee based on its actual area of operations. FHA will continually monitor lender performance rather than conduct an annual review of each “Lender Insurance” mortgagee.

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.

Predatory lending would likely become a thing of the past if proposed regulatory reform rules are put into practice. And that may mean that mortgages get more expensive and more difficult to get, lenders warn.

The new rules, which Congress is expected to vote on this week, require that financial institutions ensure that borrowers can afford to repay the mortgages they are sold. Lenders would also have to tell borrowers the most they might pay on an adjustable rate mortgage and explain that payments will vary when the interest rate changes.
“These rules should help make sure people aren’t put into mortgages they can’t afford,” said Julia Gordon, senior policy council for the Center for Responsible Lending.

Additionally, the comprehensive reform package would also ban banks from offering incentives to steer borrowers into costlier loans when they could qualify for cheaper ones, a controversial practice that fueled the subprime lending boom.

And it would prohibit prepayment penalties for adjustable rate, subprime and other risky loans and limits them to three years for traditional loans. This would help prevent borrowers from being locked into expensive loans.
More work to get a mortgage

While bankers and consumer advocates differ on the bill’s impact on mortgage availability and cost, one thing is for certain: It would take more work to get a home loan.

While the bill doesn’t specify downpayment size or creditworthiness, consumers would likely need some savings and a good credit score if they want to land a loan. This shouldn’t be seen as a tightening of credit but as a return to prudent lending standards that existed before the recent housing bubble, experts said.

Gone would be the days of no-doc or stated income loans. Mimicking the current lending environment, borrowers would have to fully document their income with pay stubs, tax returns and the like.

This isn’t to say that the self-employed or small business owners wouldn’t be able to get home loans anymore. They’d just have to provide documentation that they can afford the mortgage.

“It’s a little more work for the consumer but when they take out mortgage debt, there’s a much higher degree of certainty that it’s not disadvantageous to them,” said Barry Zigas, director of housing policy for the Consumer Federation of America.

Other exotic loans, such as option adjustable rate mortgages, which allow borrowers to pay what they like but greatly inflates the principal balance, would be harder to come by. Lenders would be likely to stick with the more conservative fixed-rate or certain adjustable-rate loans.

Borrowers, however, would still have to be on their guard and thoroughly read through their paperwork and make sure they understand the terms of the loan, experts said.

Of course, many lenders are already putting these practices into place in the wake of the mortgage meltdown. But these rules are meant to codify them once the housing market picks up again.

“They are just basic, common sense rules of business and of fairness,” Gordon said.
Standards: To be determined

If the bill passes, it may be another 18 to 24 months before lenders and consumers fully realize its impact. It will likely take the mortgage industry’s proposed regulator, the Consumer Financial Protection Bureau, nine months to come up with the new rules and then more time for the industry to institute them, said John Courson, chief executive officer of the Mortgage Bankers Association.

The regulator also could decide to set standards on downpayment size, credit scores and total debt-to-income levels, Courson said. That would have a big impact on consumers.

Financial institutions warn that increased regulation — and potentially greater legal liability — could make it harder and more expensive to obtain a loan.

“The concern is there will be less choice for borrowers,” Courson said.

The Office of Housing’s latest efforts have a common thread: the continued need to strengthen protections for consumers in the home buying process. We are working to make the housing market stronger, sustainable, and safer. Two examples of our efforts to accomplish this goal are the recent reform of HUD’s Real Estate Settlement Procedures Act (RESPA) regulations which make mortgages more transparent and understandable, and the development of Safe Mortgage Licensing Act (SAFE) regulations which better protects consumers.

Transparency is important for consumer protection. Fair dealings require open, clear information. The SAFE Act helps increase the integrity of the mortgage process and prevent fraud. In combination with RESPA reform, consumers have greater protection from possible bad actors in the marketplace. These two measures highlight our commitment to regulatory reform and consumer protection in order to bring trust and stability back to the housing market.

RESPA IMPLEMENTATION

In a previous edition, I briefly discussed some aspects of the Real Estate Settlement Procedures Act (RESPA) Rule. I now want to update you on the great efforts the Department has made providing clarity to the industry during the implementation phase, primarily involving the use of the standardized Good Faith Estimate (GFE) and the revised and expanded Settlement Statement (HUD-1).

The Office of Housing has delivered a live webcast and hosted an Industry Roundtable, and has also met with and trained many lenders and others in an effort to resolve industry implementation inconsistencies. The RESPA staff has participated in more than 150 formal speaking engagements to educate industry professionals and state and federal regulators on the new RESPA rule and plan more in the future. The response has been overwhelming. Since HUD.gov/fha HUD press releases RESPA Webcast RESPA FAQs Homeowner Warranties and Related Compensation SAFE Act the start of the year, we’ve received and answered more than 7,000 emails. Finally, the Office is currently developing multi-media guidance and education for consumers.

Most recently we have posted additional Frequently Asked Questions (FAQs) on our website aimed to give detailed guidance on topics about which we have had the most inquiries. Two of the hottest topics are pre-approvals and the use of worksheets.
For full information and guidance, please refer to the FAQ’s.

Pre-approvals

A pre-approval is a document issued by a lender stating that a consumer qualifies for a specific loan amount prior to the consumer choosing a specific property.

If the loan originator is missing one of the elements it requires for a loan application (e.g., the property address) and is not required to provide a GFE, the originator is not prevented from verifying information for which the customer voluntarily provides documentation.

Also, a loan originator IS PERMITTED to determine that a property address is not one of the required pieces of information that the loan originator needs in order to issue a GFE. It is important to note that a loan originator must consistently apply its policy on the information it deems necessary to issue a GFE, and the RESPA rule requires a loan originator to issue a GFE whenever it receives information sufficient to complete an application for a GFE.

Worksheets

A worksheet is a document issued by a loan originator that may include generic information regarding interest rates and loan fees, or a document that may provide additional information to the consumer regarding the cost of the overall transaction outside of loan fees that are disclosed on the GFE.

A worksheet may be provided to a customer for a rate quote if the consumer does not want to provide the information necessary to generate a GFE. However, loan originators should ensure the following: (1) to eliminate consumer confusion, a worksheet should

not look like a GFE and should not lead the customer to believe that it is a GFE and (2) a loan originator should NEVER use a worksheet in lieu of a GFE.

A loan originator may also use a worksheet to provide the consumer with additional information about his or her loan transaction, such as the amount of cash needed to close, seller credits, and other non-loan transaction fees that would be helpful to the consumer.

HOMEOWNER WARRANTIES AND RELATED COMPENSATION

Another recent development in RESPA is that HUD’s Office of General Counsel has issued additional guidance on “Home Warranty Companies’ Payments to Real Estate Brokers and Agents.” This new rule interprets section 8 of RESPA and HUD’s regulations as they apply to the compensation provided by home warranty companies (HWCs) to real estate brokers and agents.

Specifically, the rule provides: “(1) A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under section 8; (2) Depending upon the facts of a particular case, an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge; and (3) The amount of compensation from the HWC that is permitted under section 8 for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.”

This rule was published on June 25. You may view this interpretive rule here.

SAFE ACT

Passed by Congress as part of the Housing and Economic Recovery Act of 2008 (HERA), the SAFE Act mandates that all individual Mortgage Loan Originators (MLOs) either be licensed by the state where they do business or, if they are employed by a federally-regulated depository institution, be registered. Both licensing and registration must be done through the Nationwide Mortgage Licensing System and Registry (NMLSR), which also provides MLO’s with unique identifiers. The SAFE Act sets forth minimum standards for state licensing.

HUD is responsible for ensuring that state regulators implement and maintain SAFE Act-compliant licensing systems, as well as ensuring the overall effectiveness of the NMLSR.

HUD’s SAFE Act Office has worked closely with the Conference of State Bank Supervisors (CSBS), the American Association of Residential Mortgage Regulators (AARMR) and the states to ensure that all U.S. jurisdictions enact SAFE Act-compliant licensing systems through legislation or regulations.

Final Rule Status

HUD published a proposed rule in the Federal Register on December 15, 2009, setting forth the minimum requirements that a state would have to meet in order to be compliant with the SAFE Act. As of this date, the proposed rule has not been finalized. In the absence of a final rule, HUD cannot provide definitive guidance regarding certain compliance issues.
HUD received over 5,300 comments from the public during the comment period on the proposed rule. Most of the comments were from organizations and individuals concerned that they would need to license their employees.

Those who commented included: non-profit agencies, housing counseling organizations, loan modification and servicing specialists, housing finance agencies, those involved in owner/seller financing, mortgage industry groups and other interested persons. In developing its final rule, HUD is working to address concerns raised by comments.

In closing, I hope you find these overviews helpful. I am confident that updating the RESPA Rule and implementing the SAFE Act will lead to clear regulations for the housing industry, stronger protections for consumers, and a more stable housing market.