As I’m sure if you’ve heard by now, many banks are shying away from FHA lending. As a direct result, independent, non-bank, mortgage lenders are seeing a windfall in these loans. The old “bad news; good news” scenario.
Is this good news for independents? Banks fear the potential repercussions resulting from the certifications required by FHA when doing these FHA-insured loans. Independents seem willing to take on this additional risk. Can they continue to afford to do so?
FHA requires the lender to certify that an FHA insured loan is made in strict compliance with all their rules, regulations, and requirements. Any violations or errors expose the lender to severe penalties ranging from loan indemnifications to an action brought by the Department of Justice under the False Claims Act. Such repercussions could cost a lender some big money and potentially put them out of business.
This creates a double-edged sword situation. The FHA loan program is intended to help low to moderate income homebuyers, especially first-time homebuyers. Without such buyers, the success of housing and homeownership is severely challenged. Limiting first-time buyers will limit move-up buyers as well. Once again, in the name of protecting the consumers, the federal government throws a roadblock in their path to homeownership.
- Is it right for the federal government to do what it needs to do to protect the FHA loan program from poor lending that could cost the program very large sums of money?
- Should lenders have the responsibility to follow the rules, of which they are well aware, and have some penalties when found to violate them?
In both cases, I believe so.
The million(s) dollar question is: How far should the government go? Just ask some large lenders that have been penalized by FHA and/or DOJ.
We’re at a crossroad. FHA lending is important to the future success of housing and homeownership; lenders are needed to do this FHA lending. Banks have moved away from FHA loans. Independents have taken on more. Can independent lenders afford to sustain the losses like those assessed so far by DOJ? If not, it’s a double whammy; lose another FHA lender and no penalty collected to offset any hits to FHA insurance fund. The industry, the fund and consumers get hurt.
Insurance is intended to offset unexpected loss. The FHA insurance fund is no different. It was created to allow lenders, and the secondary market, to take on the risks associated with lending to the buyers it was designed to assist. It is understood that such buyers pose additional challenges in approvals and related risks in performance. Accordingly, the government should expect to pay some claims. After all, that is why the insurance fund exists.
Lenders should be held accountable for instances where is it determined they violated FHA requirements when approving and insuring the loan, which unnecessarily put the fund at additional risk, or resulted in a loss.
To protect themselves, they need to have procedures to constantly monitor their loan production to insure compliance and quality. Make sure their FHA loans, as well as all loans, are originated, processed, approved and closed in accordance with all legal, insuring agency and secondary market requirements. Trust but verify.
We’ve got to come to a middle ground. Lenders need the FHA, and FHA needs lenders. Consumers need both.