Concerns from the Mortgage Bankers Association President and CEO David Stevens over the U.S. Department of Housing and Urban Development’s proposed changes to the Federal Housing Administration’s loan requirements are becoming a grim reality.
At the beginning of September, HUD released a revision to its previously announced proposal to change the FHA loan level and lender certifications that each lender must adhere to.
The previous proposal eliminated the requirement that lenders approved by the FHA certify on each loan application that they are not, or have not recently been, subject to certain charges or penalties.
The new proposal from HUD reinstates that stipulation, but made it part of the annual lender certification instead of the loan level certification, as it was prior to the first round of proposed changes.
When the announcement came out, Stevens said:
The language in the certification, however, lacks clarity as to the insurability of a loan and doesn’t embody a reasonable diligence standard for FHA underwriters, address the significance of any errors in terms of risk to the FHA, or allow for an opportunity for lenders to correct any mistakes, regardless of how minor they may be. This lack of clarity continues to leave the door open to possible enforcement actions, and also encourages federal agencies, other than FHA, to take action against lenders. Absent clarity, some lenders may continue to re-evaluate which borrowers they are willing to extend FHA backed lending to and at what prices.
September isn’t even over yet and Stevens’ concern over whether lenders would pull back from FHA loans is already happening.
John Shrewsberry, Wells Fargo’s (WFC) CFO, said last Wednesday that the San Francisco bank will not make loans to FHA borrowers with low credit scores because of their higher rates of default.
In addition, Kevin Watters, CEO of Chase Mortgage Banking, said in an interview with CNBC on Monday that the FHA's loan requirements look an awful lot like subprime lending.
"FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5% down; that's subprime lending, and we're not in the subprime lending business," CNBC quotes Watters saying.
Stevens previously stated that issues like Wells Fargo’s decision may not be isolated because of the proposed rules on FHA loans from HUD.
“My worry is that this is just the tip of the iceberg,” Stevens said in an interview with HousingWire. “The challenge is that this certification requires rank and file employees to literally sign their lives away and expose their companies to extraordinary legal risks for any minor errors. That may not be a way to ensure that lenders continue to provide the access to credit that policymakers want.”
However, Stevens noted that the announcement from Wells Fargo was not a surprise. “There are others that have already pulled back or may do the same,” he added.
Ultimately, Stevens said, “The underlying concern that I have around all of this is that this FHA program is the entry point for homeownership for Hispanics, African Americans and first-time homebuyers."
"The impact of unclear rules from the FHA combined with the Department of Justice using the false claims act as an enforcement vehicle is a whole new world for this program that was made to create access to credit," he said.
