On Friday, November 16, 2012, the U.S. Department of Housing and Urban Development released its 2012 Annual Report to Congress and announced that the FHA Mutual Mortgage Insurance (MMI) Fund suffered a $16.3 billion deficit. In addition, for the fourth year in a row, the MMI Fund has failed to meet its 2% statutory reserve amount, an amount required under the National Housing Act to be held back to cover excess loss.
These figures are extremely sobering for HUD and the mortgage industry. The National Housing Act permits HUD to draw funds from the U.S. Treasury to meet its insurance claim obligations, if the fund is deemed inadequate. Never in its 78-year history, however, has the FHA had to draw upon Treasury funds for a bailout – and Secretary Shaun Donovan and FHA Commissioner Carol Galante are going to make sure it doesn’t happen on their watch.
HUD is determined to protect the MMI Fund’s financial viability, while at the same time continue to meet the Program’s mission of making the dream of home ownership available to every American family. It is for that reason that HUD has announced a series of aggressive steps it intends to introduce to accomplish both of these worthy goals. Some measures may be accomplished by the Department on its own, without seeking authority from Congress. Those proposed initiatives may include: revisions to FHA’s loss mitigation home-retention options to better assist delinquent borrowers; changes to streamline FHA short-sales; and, innovations to property disposition practices. In addition, to raise revenues, expect HUD to revise its premium cancellation policy, such that mortgage insurance premiums will be required of mortgagors throughout the life of the loan, rather than ceasing once the outstanding UPB drops below 78%. No surprise that, in 2013, HUD will once again raise mortgage insurance premium charges an additional 10 basis points, which will result in a $13 per month increase for the average FHA borrower. These “in-house” proposals will be discussed in a companion blog posting.
The Annual Report also describes several long-term changes HUD will seek to shore up the MMI Fund. Those changes are statutory and therefore will require Congressional approval. Six such proposals, listed in the Annual Report, include:
1. Extend Indemnification Authority for Direct Endorsement Lenders. FHA has been trying since 2010 to get Congress to allow the Department to demand indemnification from DE lenders (which represent 70% of all FHA lenders). Right now, HUD has authority to require lenders with Lender Insurance (LI) approval to indemnify HUD for losses. Now HUD will seek to expand that authority to all DE lenders.
2. Revise Indemnification Authority. Presently, in order to demand that a lender indemnify HUD for losses associated with FHA loans, HUD must prove that the lender “knew or should have known” of the fraudulent or errant conduct. HUD seeks an amendment to the National Housing Act that will require FHA lenders to retain all fraud-related risk, similar to the standards imposed by the Government-Sponsored Enterprises. Expect this proposal to cause major indigestion for FHA lenders.
3. Expand Flexibility to Terminate Origination and Underwriting Authority. This legislative proposal would make it easier for HUD to terminate a lender’s ability to originate or underwrite FHA insured loans if HUD were to find that the lender had an excessive rate of defaults or claims.
4. Revise Credit Watch Thresholds. This change would revise the statute governing Credit Watch termination authority, by allowing the Secretary greater flexibility to fine tune compare rates of defaults and claims based on geographic area, underwriting standards or populations served. Bottom line – it would allow HUD to more easily terminate a lender’s authority to originate and underwrite FHA loans.
5. Seek Authority to Transfer Servicing. HUD will seek Congressional authority to allow it to transfer servicing from the current servicer to a specialty servicer identified by HUD; require the servicer to enter into a sub-servicing arrangement; or, request a servicer to engage a third party contractor to assist it with loss mitigation activities. Lenders who find themselves in a Tier III ranking, or others whose servicing is deemed inadequate, will likely be subject to this new authority.
6. Provide Flexibility in HECM Program Changes. This legislative change would give HUD greater flexibility to act through Mortgagee Letters to make changes to the HECM program.
There is no question that if these initiatives are enacted, HUD will retain greater authority to protect the MMI Fund. Clearly, a worthwhile goal. But at what cost? Requiring borrowers to pay mortgage insurance premiums through the life of the loan and lenders to retain all fraud-related risk (including instances where the lender is clearly a victim of the fraud) will cause borrowers and lenders to carefully consider participation in the FHA insurance program. One thing is for sure, expect significant changes in FHA origination and servicing requirements in the coming months.