Housing and Urban Development Secretary Shaun Donovan is expected to tell lawmakers Wednesday that the Federal Housing Administration needs greater authority to cut off mortgage lenders with high default rates.
FHA Commissioner Dave Stevens said in an interview Tuesday that his agency, a part of HUD, is focusing on lenders that have outsized default rates. However, it can terminate a lender's authority to write FHA loans only if HUD's Mortgagee Review Board finds the lender has broken agency rules.
Such violations include approving loans that do not meet FHA requirements; failing to document the source of income to qualify for a mortgage, or the funds used to close; and omitting documentation from underwriting analysis.
"FHA needs the ability to address lenders that don't perform within any reasonable range that's acceptable," Stevens said. "We have institutions with quality performance that is unacceptable. Listen to the Secretary's testimony on Wednesday. He will address this subject."
The House Financial Services Committee hearing will focus on the actuarial review of FHA released last month, which showed its capital reserves had fallen to 0.53%, far below the congressionally mandated level of 2%.
Committee members are concerned the drop in capital reserves could force the FHA to request an appropriation from Congress.
It took more than a month for FHA to go through its own bureaucratic process to pull the license of Ideal Mortgage Bankers Ltd., a fast-growing mortgage lender that did business as Lend America.
Federal prosecutors had sued the Melville, N.Y., company in late October, claiming it had falsely certified that more than $14 million in loans met FHA requirements. But a judge rejected a request for a temporary restraining order that would have stopped the company from writing FHA loans.
Lend America posted a notice on its Web site Tuesday that it has stopped originating mortgages and had ceased operations.
HUD is taking other steps to raise the bar for lenders that do business with FHA. On Monday the department proposed raising the minimum net worth requirement for FHA lenders and making them liable for errors by middlemen like mortgage brokers and correspondents.