A prominent figure in mortgage origination technology is up in arms because HUD rules in effect bar many users of electronic lending networks from making FHA loans.
Jack M. Guttentag, chairman of GHR Systems Inc., complained, "They are trying to protect themselves against fraud by making requirements that the operators (of computerized loan origination systems) be mortgagees," he said. "What they don't understand is how the marketplace is structured."
According to the Department of Housing and Urban Development, whoever takes the application on a CLO terminal is considered the mortgagee. This mortgagee must meet HUD's requirements for net worth, work experience, and employees.
A mortgagee is required, for example, to maintain a net worth of at least $50,000, 20% of which must be in cash or liquid assets.
Most operators of CLO networks are real estate brokers or mortgage brokers. Generally, they cannot meet such requirements, Mr. Guttentag said.
The result: Relatively few Federal Housing Administration loans are originated on CLOs.
"Well, it's not an overwhelming problem, because FHA has a small part of the market - 5% or 6%," Mr. Guttentag said. "But it is an irritation; it is a problem we wish we didn't have."
The problem has become an even greater issue as CLOs have grown in popularity over the last half year or so. During that time, real estate brokerage companies and lenders have been forming "controlled business arrangements" - a legal means to share loan referral fees under HUD rules - at a rapid pace. These ventures use electronic loan origination networks, which require little training and lending expertise, to originate mortgages.
As loan volume from CLOs has increased, the inability to originate FHA mortgages with the system has become more nettlesome, said Mr. Guttentag.
Some of the nation's largest real estate brokerage outfits that operate CLOs have been tripped up by the HUD regulations. An executive at one such company, which operates thousands of real estate branches, said most of its outlets could not afford the net-worth requirements.
Mr. Guttentag said the FHA would lose market share to private mortgage insurers if it does not adapt to the new ways of loan originating. He said many private mortgage insurers were backing loans that appeal to the same market as FHA loans.
GHR's CLO system, Mars, offers some of these loans to its users.
"I am not trying to make a point that the future of the CLO is depending on this happening, because it doesn't," he said, referring to HUD's changing its regulations. "It doesn't stop (CLO operators) from going ahead. What it does do is push them to look in the marketplace for substitutes for FHA, and they are out there."