In the past two years the Federal Housing Administration insurance program has been a life raft for mortgage brokers that formerly made their living from nonprime products.
But changes proposed for the program that appear to be "pro-broker" might wind up hurting both third-party independent brokers and small mortgage banking firms.
In short, FHA has decided it no longer wants to deal directly with brokers, collect their annual financial audits or approve credentials. To some, the agency is throwing in the towel on pretending it can police brokers.
To conserve resources and reduce its risk exposure, the Department of Housing and Urban Development is proposing that wholesalers and correspondent lenders (rather than FHA) should be the ones deciding which brokers may be trusted to make government-backed loans.
If something goes wrong — or if there is fraud or misrepresentation — the agency will seek damages from the FHA-approved lender that has substantial net worth to indemnify it against losses caused by broker-sourced loans.
"Lenders will ultimately be accountable for the performance," said FHA commissioner David Stevens.
Though on the surface brokers appear to be getting a break from the government, a fear is growing among some salespeople that, instead of wholesalers' policing brokers, they might throw the brokers in a ditch and quit the channel entirely.
Shortly after the FHA announcement this month, Mike Conkle, the president of First Family Mortgage of Louisiana, said he received a long list of conditions from one of his wholesale funders.
"They wanted information on companies that I not only own now but info on companies that I owned over 10 years ago," Conkle said.
HUD wants to increase the minimum-net-worth requirement for FHA-approved lenders to $1 million, from the current $250,000. Brokers get a pass, but their table funders don't.
"I won't miss the cost" of the annual audit, said Josie Taylor, the president of Heritage Mortgage in Chino Hills, Calif.
The past president of the Orange County chapter of the California Mortgage Brokers Association, Taylor said her firm depends on FHA for nearly 95% of its volume. She said she believes "it probably will be OK for lenders to take responsibility for brokers" but worries that some banks might decide to fund FHA loans themselves by relying solely on retail.
Or they could turn to small banks and credit unions that do not have FHA mini-Eagle designations. "That would put us out of business," she said.
Brokers also are concerned that small mortgage banking firms (those that fund themselves using warehouse lines) will be forced out of the FHA program because of the higher net-worth requirement.
Mortgage banking consultant Brian Chappelle said he expects HUD to move quickly on the proposed rule. He noted that the bulk of broker approvals come up for their annual renewal in the first quarter. "They want to get this done quickly because they don't want to recertify brokers in the first quarter," he said.
Mr. Chappelle, the founder of Potomac Partners in Washington, said he doubts the net-worth requirement will affect many mortgage bankers but noted that lenders need a higher net worth just to get a warehouse line of credit.
The Mortgage Bankers Association, so far, is keeping an open mind on what's been proposed. "Our membership has a mix of views," said MBA lobbyist Josh Denney.
But the trade group has said it opposes increasing the net-worth requirement for FHA-approved lenders to $1 million.
"That's a pretty big jump" for small independent mortgage bankers, Mr. Denney said. MBA supports increasing the net-worth requirement to $500,000.
In another risk-reduction move, FHA has reduced the loan proceeds that borrowers can get from an FHA-insured reverse mortgage by 10%, which lessens FHA's risk exposure at the cost of tens of thousands of dollars no longer available to senior citizens from these loans.
The 10% reduction on FHA-insured Home Equity Conversion Mortgages takes effect Oct. 1. Lenders that can get an FHA case number by Sept. 30 will be able to spare their clients from the cut.
To get a case number for such a loan, the lender must give FHA a certificate that the borrower has completed the agency's counseling requirements. This certificate must be signed by the senior citizen and counselor.
"Counseling agencies are swamped," said Peter Bell, the president of the National Reverse Mortgage Lenders Association, a trade group.
FHA said it had decided to take this sudden action because the reverse-mortgage program faces an estimated $800 million shortfall due to declining house prices and it is unlikely congressional appropriators will subsidize these credits.
In fact, the appropriators suggested that FHA consider a reduction in the loans' proceeds.
"For several months, we have been working on changes to the program to improve performance and mitigate growing risk concerns," said the FHA's Stevens. "We are taking prudent steps at this time to protect the viability of the … program."
An analysis by the reverse mortgage trade group of loan production by three large lenders showed 21% of senior citizens would likely be unable to pay off their existing mortgages if the loan proceeds were trimmed 10%.
For senior citizens who need a reverse mortgage to remain in their homes, this means they might have to sell or face possible foreclosure.