FHA Takes Steps to Limit Risk of Bad Loans

The Federal Housing Administration announced three steps Friday to protect its insurance fund from sustaining further losses.

The Department of Housing and Urban Development, which oversees FHA, said new regulations will require certain lenders to indemnify HUD for 'serious and material' violations, and for 'fraud and misrepresentation,' on loans that should never have been made in the first place.

HUD also said lenders now must maintain a two-year seriously delinquent claim rate that is at or below 150% of the aggregate rate for states in which a lender does business. FHA said it will monitor lenders' performance to ensure they meet the program's eligibility standards.

FHA was rebuked last year by HUD's inspector general for not having a formal process for reviewing all claims paid on defaulted mortgages. It did not have a process to review even the riskiest loans.

Finally, FHA said Friday that it plans to publish a notice in the Federal Register "soon" that will reduce the maximum allowable seller concessions "to one more in line with industry norms." Last year, FHA announced it would slash the maximum seller contribution from 6% to 3%, but its proposal met strong resistance from homebuilders and realtors.

FHA said in a press release that the current level of seller concessions exposes the agency "to excess risk by creating incentives to inflate appraised value."

The revised proposal allows for a 30-day comment period before a final rule is issued.

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