The Federal Housing Administration announced on Thursday it was seeking to streamline and clarify its rules in a bid to entice traditional banks to rebuild their FHA loan business, as the agency seeks to give consumers a greater choice of lenders.
The FHA provides mortgage insurance on loans created by approved lenders, helping borrowers with less money for down payments or lower credit scores qualify for home loans. The FHA insurance protects the lender in the event of a borrower default.
Some academics and policymakers have expressed concern about the growing presence of nonbank lenders in mortgage lending, such as online lender Quicken Loans, given they are not as strictly regulated and lack a deposit base to help weather downturns.
Traditional banks made a significant exit from the FHA mortgage business in recent years, citing costly and complex rules. But now the FHA said it wants to more clearly explain what lenders and what types of mortgages qualify for its programs in an effort to bring them back.
“We are proposing a new, more transparent, plain-English set of requirements that preserves our enforcement authority without scaring lenders away from doing business with the FHA,” FHA Commissioner Brian Montgomery said.
Depository institutions now make up just 13 percent of new FHA loans, with nonbank institutions originating the rest, he said.
According to the FHA, it was estimated in 2018 that one out of every five mortgage loans originated in the United States is an FHA loan. Such loans require a downpayment of only 3.5 percent, compared with the 20 percent required for most conventional mortgages.
Specifically, the FHA is proposing providing more clarity around what a lender needs to do, both in general and on a loan-by-loan basis, to qualify as an FHA-certified lender. The agency also wants to provide more clarity around how it identifies certain loans as defective and how lenders can address those deficiencies.
The FHA had sparred with some large institutions in the past, charging some with misusing the program and obtaining insurance on loans that did not qualify.
Source: By Pete Schroeder