Wells Wants FHA Minimum Even Higher

As early as next week the FHA will release its final rule on net-worth minimums for its lenders, setting the stage-perhaps-for a battle with nonbanks that can't meet the initial $1 million requirement, which will grow to $2.5 million within three years.

It's no secret that for thinly capitalized firms playing in both the FHA and GSE markets, the writing is on the wall: raise more money or find some type of way to survive, either by joining an adequately capitalized nonbank or even a bank (or a net branch operation).

The FHA is tightening the screws because it desperately wants to stem losses at its beleaguered insurance fund, driving what's left of the industry's "bad guys" and weaker (financially) firms out of the business. But there's also a school of thought here that FHA is making these and other changes to intentionally reduce the number of lenders it has to manage. In other words, the agency would much rather deal with the industry's "big boys" than the almost 14,000 bankers and brokers that are currently mortgagees. Of this group, a mere 369 make the $2.5 million cut-off.

It's hard to say where FHA's thinking is on all this though commissioner David Stevens said recently that he believes a thriving brokerage segment is essential to having a strong mortgage market. Also, FHA's main goal is to protect the fund and as everyone knows if the government insurer were not around, the mortgage market would be in dire straits.

Of course, if the housing market were not in the tank and if the insurance fund was healthy, none of this would have been proposed in the first place.

Still, there's a fear-not necessarily unfounded-that the nation's largest lenders are strongly encouraging FHA to hike its minimums because they know it will reduce competition, something that would greatly benefit them.

Several mortgage executives are less-than-happy with a comment letter sent in to FHA by the nation's largest lender, Wells Fargo, on the capital rule. Wells actually thinks the FHA is too soft on its mortgagees: For third-party lenders, it wants the first-year minimum to be $3 million, increasing to $4.5 million by 2012.

Bill Kidwell, a past president of the Colorado Association of Mortgage Brokers, sees Wells' comments as irrefutable evidence that the largest lenders will use new FHA standards "to absolutely control the landscape."

Brian Benjamin, a principal in Two Rivers Mortgage in Red Bank, N.J., puts it more bluntly: "The last thing in the world Wells wants is competition."

A Wells spokesman declined to comment on what others think of the company but noted, "This business carries higher risks, so higher capital standards and robust controls are necessary to support it. As a result, we feel a higher net-worth requirement is appropriate for mortgagees originating FHA loans through third parties."

If FHA does in fact hike its minimums as proposed (and they stick without being watered down with loopholes) there definitely will be less players in the industry. It doesn't take a genius to figure out that some firms will close their doors, either selling what's left of their livelihoods or shutting the doors without getting a payout of some sort.