Lydian Seeking to Leverage New FHA Expertise
Realizing that more and more lenders are looking to get into FHA but have little real experience on how to process these loans, Lydian Data Services here has established Lydian Data Government Services, a new subsidiary providing mortgage processing, closing, post-closing and quality control services for FHA and VA loans.
According to a 2007 Government Accounting Office report, FHA's product restrictions and lack of process improvement relative to the conventional market was largely responsible for the decline in market share, despite comparing favorably in cost to the subprime programs that largely eclipsed them. The collapse of the subprime market has led to the resurgence of interest in FHA, and recent revamping has positioned the agency to reclaim the volume it once enjoyed. GAO expects FHA to fund 10% of home purchases in 2008 and 15% in 2009, continuing to levels not seen in over a decade. So how do lenders get their piece of the pie?
"We have formed a new subsidiary called Lydian Data Government Services realizing the renewed demand for FHA," explained Brian Fitzpatrick, executive vice president of Lydian Data Services. "This will focus on FHA and government loans. We'll be an outsourcer for lenders that are experiencing barriers to entering FHA. FHA was designed to do loans for the underserved credit markets. That credit spectrum was completely served by subprime and now that's not there anymore so FHA is going to experience a dramatic increase in market share."
But is FHA truly so complex that lenders would need to outsource the processing of these loans to a vendor? "Another reason why lenders decided to leave FHA for subprime was because FHA was infinitely more complex," answered Mr. Fitzpatrick. The vast majority of lenders found that the FHA process was 25% to 50% more costly when compared to processing a subprime or conventional loan. "In recognizing this, we went into the market and saw that lenders are really suffering. They're not prepared to handle the complexities that FHA brings to the table. With FHA there's a very specific process. For example, the lender has to submit the loan to HUD and if it doesn't meet the guidelines or if something is wrong that loan is returned to the lender and it's the lender's job to get it fixed. If it's not fixed, HUD won't issue a mortgage insurance certificate. Without the mortgage insurance certificate basically the lender is not getting the backing of the government and the loan can't be put in a government security. What the lender has is an unsellable asset."
Back in the 1970s and 1980s, mortgage bankers tended to specialize in FHA/VA lending while savings and loans concentrated on conventional loans. Skilled workers used to be readily available, but that labor force dwindled over the last 10 years as home prices rose beyond FHA limits in many markets, government programs became less attractive to originators, and nonprime loan products became more prevalent.
"We decided to open this subsidiary in New Jersey because it's closest to the biggest home loan centers," noted Mr. Fitzpatrick.
"During the time FHA was going gangbusters a lot of lenders in this area started FHA. A lot of the employees familiar with FHA are in the area. We found it to be a target-rich place for FHA employees. Because FHA has trailed off there isn't a lot of experience so we decided to go where the experience is," he said.
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