The Department of Housing and Urban Development’s (HUD) announcement on April 5th of its forthcoming publication of a final ruling for the mortgage industry was no surprise. Their intention to make changes had been originally announced in September of 2009 by FHA Commissioner, David H. Stevens. The new regulations for multifamily mortgage lenders who benefit from FHA insurance guarantees will now be following similar requirements recently imposed on Fannie Mae and Freddie Mac lenders. The surprises may come later, however, as the changes reshape the commercial lending sector.
HUD regulators contend reserve and financial stability requirements are necessary and appropriate to protect the stability of credit markets for borrowers and lenders. Those in the industry predict many smaller lending institutions will have difficulty meeting the new requirements and some may merge with larger entities, but it is all in the interest of strengthening a battered credit market to meet the demands of an emerging, if slow, recovery.
It will become more difficult to achieve lender approval, but the Feds are streamlining that process so it will be quicker. Lenders will be newly liable for the actions of their mortgage bankers and brokers, which may spur them to create tough approval standards of their own. A chief risk officer will also be charged with watching the proverbial ‘hen house’ on behalf of the FHA.
There is a gentle three-year waiting period to allow lenders to prepare and conform to the standard, more than adequate time to eliminate bonuses, build net worth, cut costs and fund reserves.
- Approved lenders and applicants to FHA single-family programs must have a net worth of $1 million plus 1% of total loan volume in excess of $25 million.
- Approved lenders and applicants to FHA multifamily programs must have a minimum net worth of $1 million.
- Multifamily lenders that also engage in mortgage servicing must have an additional 1% of total volume in excess of $25 million.
- Multifamily lenders that do not perform mortgage servicing must have an additional 0.5% of total loan volume in excess of $25 million.
Independent mortgage brokers may be dealt their final death blow with the final rule regarding lender approval and liability:
- Streamline Lender Approval – FHA-approved lenders currently assume liability for all the loans they originate and/or underwrite. While mortgage brokers will continue to be able to originate FHA-insured loans through their relationships with approved lenders, they will no longer receive independent FHA eligibility approval.
- These changes align FHA with Fannie Mae and Freddie Mac and have potential to increase the number of mortgage brokers eligible to originate FHA-insured loans while providing for more effective oversight of brokers by FHA-approved lenders.
- Mortgage brokers or other third-party originators, already approved by FHA, will be authorized to continue to originate FHA-insured loans through the end of the calendar year without sponsorship of an FHA-approved lender. Commencing January 1, 2011, however, the origination authority will end.
In spite of the shock-and-awe reaction of many to the final rule announcement, any lending officer with more than 20 years in the industry knows the credit markets operate perfectly well with greater restriction and diligent oversight.
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