Minimizing risk is the main goal of the FHA's new steps for strengthening their Mutual Mortgage Insurance Fund.

Acting Federal Housing Administration (FHA) Commissioner Carol J. Galante recently announced additional steps in a series to protect and strengthen the FHA’s Mutual Mortgage Insurance Fund.  The FHA hopes to limit risk and continue to enable the agency to continue to fulfill its mission to provide access to homeownership for qualified borrowers.

These new regulations strengthen the process by which FHA requires certain lenders to indemnify the U.S. Department of Housing and Urban Development (HUD) for insurance claims paid on mortgages that do not to meet the agency’s guidelines. The final rule requires all lenders who insure mortgages on HUD’s behalf, “Lender Insurance” mortgagee, to meet stricter performance standards to gain and maintain their approval status.  Currently, more than 80 percent of all FHA mortgage loans are insured by Lender Insurance lenders.

“Taken together, the changes announced today will protect FHA’s insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD’s underwriting expectations” said Galante.  “We hope that the added clarity and certainty provided through these rules will enable lenders to extend financing opportunities to larger numbers of American families as the nation’s housing market and economy continue to recover.”

The regulation will change the basis under which lenders qualify for Lender Insurance authority. A Lender Insurance mortgagee must demonstrate a two-year seriously delinquent and claim rate at or below 150 percent of the aggregate rate for the states in which the lender does business.  FHA will monitor performance on an ongoing basis to ensure that lenders continue to meet the program’s eligibility standards.  Additionally, the regulation will establish a process by which new HUD-approved lenders created through corporate mergers or acquisitions may be considered for Lender Insurance authority.

For those loans insured by Lender Insurance lenders, HUD may also require indemnification for violations of FHA origination requirements and for fraud and misrepresentation. FHA plans to propose to reduce the maximum allowable seller concession from its current level to one more in line with industry norms.  The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. The revised proposal calls for a 30 day comment period and following an analysis of the public comments received, a final rule will be issued.