High-Default Branch Means Six Months of Suspension by FHA

The Federal Housing Administration is determined to clamp down on bad lending practices and it is preparing to suspend a lender's operations in a whole metropolitan area for six months if one branch has a default rate three times above the norm. FHA commissioner David Stevens said he is prepared to use FHA Credit Watch termination powers for the first time. And FHA will be issuing a mortgagee letter to implement it with an immediate effective date. After one year, the suspension threshold will be two times the normal default rate. "This is strong medicine, but it will have a positive impact," said mortgage banking consultant Brian Chappelle. At the same time, FHA is increasing its monitoring of lenders and it will publish a "report call" on lender performance that lenders can use as a "benchmark," the commissioner said. The Department of Housing and Urban Development also is pursuing regulatory and legislative changes to impose indemnification requirements on all FHA direct endorsement lenders. "This would essentially require all approved mortgagees to assume liability for loans they originate or underwrite should they violate our polices and underwriting standards," Mr. Stevens told reporters.