Mortgagee approval regulations recently published by the Department of Housing and Urban Development will discourage smaller mortgage originators from retaining servicing, the Mortgage Bankers Association believes. The rules set standards for lenders who participate in HUD insurance programs.
The regulations, which go into effect Jan. 8, require additional net worth equal to 1% of retained servicing over $25 million.
"This means that many smaller companies who have delivered quality product, to HUD will be encouraged to sell their servicing," said Brian Chappelle, MBA staff vice president for residential finance and loan administration.
Moreover, he said, there is no credit toward net worth for the value of the retained servicing.
"It penalizes the very lenders who have HUD'S best interests at heart," said Chappelle. "If a lender originates a loan and hangs on to the servicing, it will have every incentive to do a quality job because it won't get its money unless it does."
Chappelle said MBA is also concerned that rules for termination of lender eligibility do not properly allow for the substantial governmental pressure to loan in very difficult areas.
The regulations would terminate a lender from eligibility if its rates of defaults and claims exceed 200% of the local average. They would place on a credit watch lenders whose claim and default rate reaches 150% of an area's average.
The MBA had suggested that, rather than termination at the 200% level, a lender should be required to meet with HUD officials and submit a plan for improvement when the 150% level is reached.
If performance does not improve or no justification can be found for high rates, the lender should be terminated, the MBA recommended.
The final regulations require the HUD secretary to examine census tract data before a final termination notice is sent.
If it is determined that the high rate is due to lending in an underserved area, the secretary may decide not to terminate the lender.
That is not good enough for the MBA. "The regulations don't differentiate between plain-vanilla HUD programs and those that are aimed at borrowers that are very difficult to serve," said Chappelle.
He said the MBA will work with the Clinton administration to try to get the regulations changed.
The final regulations require a net worth of $250,000 plus 1% of the volume of mortgages in excess of $25 million, up to a maximum net worth of $1 million. The mortgage volume includes the value of the retained servicing.
Mortgagees approved only for the multifamily program must have a minimum net worth of $250,000. Those that are loan correspondents must have a minimum net worth of $50,000, plus an additional $25,000 for each branch office up to a maximum net worth of $250,000.
The MBA had proposed a tiered formula that would range from a net worth requirement of $250,000 for lenders with originations of $50 million or less annually to $1 million for lenders who originate $250 million or more.