Some lenders fault the Department of Housing and Urban Development's plan to strengthen the Federal Housing Administration for — of all things — reducing regulation.
HUD Secretary Shawn Donovan's road map, laid out in congressional testimony last month, was widely viewed as an attempt to raise the bar for companies to do business with FHA. Lenders' net-worth requirements would rise, for example.
But critics of the proposal say HUD's attempt to shift responsibility for supervising mortgage brokers from the department to FHA-approved lenders would eventually have the effect of lowering market standards. These lenders are urging HUD to keep its current requirement that brokers of FHA loans maintain a minimum net worth and provide the government with audited financial statements, just as lenders do.
Forcing lenders to monitor brokers without maintaining certain standards would result in a "race to the bottom," said John Johnson, the president and chief executive of MortgageAmerica Inc., a Birmingham, Ala., lender.
Some lenders would ultimately give up standards to increase production, forcing others to do the same to compete, and repeating the cycle that helped to inflate the last housing bubble, he said.
"There should still be some standards to participate in FHA," Johnson said. "Unless FHA revises the rule to include audited financials, then that will be the end of them because I can't require them if the competition doesn't."
Similarly, Kevin Marconi, the chief operating officer at United Fidelity Funding, a wholesale and retail lender in Kansas City, Mo., said that rather than scrapping the net-worth minimum for brokers — as HUD has proposed doing — it should raise that requirement from the current $63,000 to somewhere between $100,000 and $150,000.
That would "weed out a lot of fly-by-night broker shops," Marconi said.
Weeding out the chaff — among lenders and brokers — is certainly one of HUD's goals.
Since the subprime market imploded in 2007, the FHA, once a mortgage industry backwater, has seen its volume explode.
FHA loans are pretty much the only product lenders can offer most borrowers who have little money for a down payment (unless they qualify for the government's loan programs for veterans or rural residents).
FHA lending now accounts for 30% of all residential mortgages written, up from 3% in 2006, said Brian Chappelle, a partner at Potomac Partners, a Washington consulting firm.
Higher volume and share has come with higher defaults and losses. According to the Mortgage Bankers Association, 8.67% of FHA loans were 90 days overdue or in foreclosure at the end of the third quarter, up from 5.66% three years earlier. In November, a long-awaited audit showed that in the fiscal year that ended Sept. 30, the FHA's capital reserve ratio had fallen to 0.53%, well below the congressionally mandated minimum of 2%.
The FHA now says it attracted companies with questionable practices during the growth spurt.
"The mortgage industry is coming out of an unprecedented period where unscrupulous players and institutions without capital, virtually anybody could put out a shingle and call themselves a mortgage lender," Dave Stevens, the FHA's commissioner, said in an interview in December.
The agency has stepped up enforcement actions against FHA lenders, including two that collapsed last year, Taylor, Bean & Whitaker Mortgage Corp. and Ideal Mortgage Bankers Ltd., better known as Lend America.
Opponents and supporters of HUD's proposed rule agree on one thing: It would make the government mortgage market look more like the conventional one, as large bank-owned lenders gained share.
"HUD wants the bigger, more sophisticated, better-capitalized players out there," said Paul T. Bossidy, the president and CEO of Clayton Holdings LLC, a Shelton, Conn., company that provides underwriting, due diligence and other services to lenders. The agency is looking for companies with the resources to invest in training and technology, he said.
Many small lenders said the proposed hike to their minimum net worth would put them out of business. HUD wants to raise the requirement from $250,000 to $2.5 million over three years. That would disqualify 70% of the FHA's current roster of lenders (assuming none of them raised their net worth in the meantime).
"Big banks have a lot of expenses and no need to be competitive," said Jeff Lewis, the chairman of Generation Mortgage Co., an Atlanta lender. "But there's a mind-set right now in Washington that the best way to protect consumers is to restrict competition."
Yet even some of the largest lenders want HUD to let brokers continue closing loans in their own name and maintain case numbers, to help the Goliaths manage their own risk.
For example, many lenders said they rely on the FHA's Neighborhood Watch Web site to monitor and compare the default ratios of brokers.
"If HUD stopped providing compare ratios for correspondents, it is quite possible that loan quality would suffer," Rick Aneshansel, the chief financial officer at U.S. Bank Home Mortgage, a unit of U.S. Bancorp, wrote in a comment letter — one of about 250 HUD has received since it issued the proposed rule in November.
David Moskowitz, deputy general counsel at Wells Fargo & Co., recommended in a comment letter that HUD maintain a recertification program for brokerages that includes background checks of key officers and directors and an assurance that brokers are not on any previous list of debarment.
Other changes to the FHA are coming quickly this year as well. Donovan has indicated that HUD may try to raise the current cap on annual mortgage insurance premiums, which would require congressional approval.
Policymakers also are considering increasing the minimum down payment for FHA borrowers and adopting a minimum FICO score for the first time.