Lenders Beef Up FHA Underwriting
The penalties for getting caught under the Credit Watch program are not all that painful sometimes, but they are forcing Federal Housing Administration lenders to tighten their underwriting standards.
Last September, the Department of Housing and Urban Development placed the San Antonio branch office of Fieldstone Mortgage Co. on its Credit Watch list for having a default and claim rate that was twice the average of other FHA lenders in the same Texas market.
FMC, based in Columbia, Md., closed the branch and terminated the employees after conducting an investigation. However, Fieldstone has another FHA-approved branch in San Antonio, so it can still serve the San Antonio market.
In its investigation, Fieldstone found that the branch did a lot of business with homebuilders and a lot of the borrowers were minority, first-time homebuyers who received downpayment assistance, according to FMC general counsel Cynthia Harkness.
In addition, the branch originated a lot of the mortgages with 20-year maturities. "We found there is a glitch in the AU systems that assign an overly high credit rating on 20-year loans," she said. "We have completely ceased that practice."
(Fieldstone ran the FHA loans through the automated underwriting systems offered by Fannie Mae and Freddie Mac at the time.)
FMC's parent, Fieldstone Investment Corp., is currently in registration to become a publicly traded real estate investment trust. FMC will remain a fully taxable subsidiary of the REIT.
Meanwhile, Homestead Financial Services Inc. got caught by Credit Watch, which is forcing the small upstate New York mortgage banker to tighten its underwriting.
"We will be more conservative, which means you lend to less people," said Homestead president Timothy Ward. HFSI originates about $100 million a year - mostly retail.
Mr. Ward told this newspaper that he used the same underwriting criteria for the past 10 years and HFSI's default/claim rate was always below the average.
After the default rate on FHA loans originated in Buffalo, N.Y., spiked in 2002, he could not find any obvious reasons. But he realized the larger lenders must have become more conservative to reduce their default and claim rates.
"They aren't lending money to people like they use to. Is that what HUD wants? I am not so sure," Mr. Ward said.
Despite the Credit Watch suspension, HFSI can still originate FHA loans in the Buffalo area through its Buffalo branch office. The suspension applies to its Syracuse, N.Y., branch office making loans in Buffalo. "The impact will be negligible," Mr. Ward said.
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