HUD Seeks to Force Lenders to Repay Mortgage Losses

By:
Peter King | October 11, 2010

The U.S. Department of Housing and Urban Development (HUD) is seeking new authority to require lenders to repay the government for losses on FHA loans that did not meet the agency’s guidelines. 

The changes would require lenders to either reimburse the government or indemnify it against loss for “serious and material” violations of FHA loan origination guidelines such that the mortgage should never have been issued in the first place. The new rule would apply to lenders authorized to insure loans on FHA’s behalf.
 
"It's important that our expectations are crystal clear," said FHA Commissioner David Stevens. "We need to clarify which circumstances we'll require indemnification and the level of loan performance we expect lenders to maintain."
 
Lenders may be required to indemnify HUD against losses on FHA loans they insured if they failed to verify the borrower’s income, assets or creditworthiness, or did not ensure the property appraisal met FHA guidelines, including addressing health and safety deficiencies identified in the appraisal.
 
The rules also spell out new and stricter performance standards for lenders to be able to obtain or maintain authority to insure loans on behalf of FHA.
 
The new rules are the latest in a series of policy changes being sought or implemented to protect FHA against further mortgage losses and rebuild its reserve fund. FHA recently raised its annual insurance premium to 0.9 percent of the loan balance, up from 0.55 percent previously, as well as raising its credit requirements for borrowers to qualify for an FHA mortgage.

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