TopMortgage Compliance Update (1)
July 20, 2010
FHA: Only Quality Loans Need Apply

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On July 19, 2010, FHA Commissioner David H. Stevens issued a Special Edition statement about lenders "exuberance in the marketplace to find ways to increase loan origination revenues." While not singling out "opportunistic lenders" or acknowledging a more widespread trend, Commissioner Stevens wants to be "very clear on FHA's position as it relates to underwriting, lender accountability and affordable programs."

In this carefully worded notice, Commissioner Stevens states unequivocally that:
  • Quality underwriting is not only essential - it is expected, and
  • Affordable products are core to FHA serving its mission.
If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.
I. Quality underwriting is not only essential - it is expected.
  • Every lender engaging in business with FHA is expected to perform and maintain quality underwriting standards.
  • Mortgagees are expect to have the right people and processes in place to make quality underwriting decisions, perform thoughtful analysis of a borrower's ability to repay the loan, and adhere to realistic underwriting ratios.
  • Processes and staff must be well-equipped to assess the overall quality of the loan, determine a realistic income level and analyze the borrower's true ability to repay the loan. It is imperative we look at income levels, credit history, and qualifying ratios realistically and make decisions responsibly.
FHA Implementing Loan Level Review Tools
  • FHA has refined and re-tooled its loan level review processes to more effectively spot unsatisfactory underwriting performance.
  • Utilizing updated risk targeting criteria and a collaborative approach, FHA is executing an enhanced strategy to identify underwriting deficiencies and take action to protect FHA from unwarranted risks and losses.
  • Comprehensive and calculated risk management will permit FHA to single out those lenders that are needlessly endangering FHA and the continued availability of its programs.
  • Loan Level Reviews: FHA's loan level review processes have been enhanced to more effectively manage risks and minimize losses arising from poorly underwritten or fraudulent loans.
  • Loan Evaluation: processes have been modified and aligned across all Single Family offices to achieve a collaborative and comprehensive approach to evaluating loans throughout the loan life cycle.
  • Post-Endorsement Technical Reviews: case selection criteria have been revised and review procedures enhanced and standardized.
  • Lenders and Servicer Reviews: the targeting tools and methodology have been strengthened to better target lenders and loans that pose the greatest risks to FHA.
  • Quality Control: methodologies to areas where some originators may try to take unique advantage of the flexibility of FHA without the appropriate focus on quality (i.e., loans originated for non-FHA to FHA refinanced loans).
  • Streamline Refinances: risk can now be identified simply by looking at the original loan quality before it was refinanced into an FHA loan.
II. Affordable products are core to FHA serving its mission.
  • Avoiding Overcharges and Adverse Selection: FHA expects lenders to maintain the spirit and intention of these programs by providing close control over how these programs are implemented and how compensation on these loans is paid to an originator's staff.
  • Compensation: Lenders must keep very close control over compensation programs to ensure borrowers are not paying more than they should to haveaccess to FHA's affordable programs.
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