Eye on Washington

Over the past two years the Federal Housing Administration insurance program has been a life raft for mortgage brokers that formerly made their living from nonprime products. But new changes proposed by the agency — which appear to be "pro-broker" — might wind up hurting both of these third-party independents and small mortgage banking firms.In short, FHA has decided it no longer wants to deal directly with brokers, collect their annual financial audits and approve credentials. To some, the agency is throwing in the towel on pretending it can police brokers.To conserve resources and reduce its risk exposure, the Department of Housing and Urban Development is proposing that wholesalers and correspondent lenders (and not FHA) should be the ones deciding which brokers should be trusted to make government-backed loans.If something goes wrong — or if there is fraud or misrepresentation — the agency will seek damages from the FHA-approved lender/bank that has substantial net worth to indemnify it against losses caused by broker-sourced loans. "Lenders will ultimately be accountable for the performance," said FHA commissioner David Stevens.Even though on the surface brokers appear to be getting a break from the government, there's a growing fear among some salesmen that instead of wholesalers policing brokers they might throw them in a ditch and exit the channel entirely.Shortly after the FHA announcement came out, Mike Conkle, president of First Family Mortgage of Louisiana, said he received a long list of conditions from one of his wholesale funders. "They wanted information on companies that I not only own now but info on companies that I owned over 10 years ago."HUD wants to increase the minimum net-worth requirement for FHA-approved lenders to $1 million from the current $250,000. Brokers get a pass, of course, but their table funders don't."I won't miss the cost" of the annual audit, said Josie Taylor, president of Heritage Mortgage, Chino Hills, Calif.The past president of the Orange Country chapter of the California Mortgage Brokers Association said her firm depends on FHA for nearly 95% of its volume. She believes, "It probably will be OK for lenders to take responsibility for brokers" but worries that some banks might decide to fund FHA loans themselves by relying solely on retail. Or they could turn to small banks and credit unions that don't have an FHA mini-Eagle. "That would put us out of business," she said.Brokers also are concerned that small mortgage banking firms (those that fund themselves using warehouse lines) will be forced out of the FHA program because of the higher net-worth requirement.Mortgage banking consultant Brian Chappelle expects HUD will move quickly to finalize the proposed rule. He noted the bulk of broker approvals come up for annual renewal in the first quarter. "They want to get this done quickly because they don't want to recertify brokers in the first quarter," he said.The founder of Potomac Partners in Washington doubts the net worth requirement will impact many mortgage bankers. Mr. Chappelle noted that lenders need a higher net worth just to get a warehouse line of credit.The Mortgage Bankers Association, so far, is keeping an open mind on what's been proposed. "Our membership has a mix of views," said MBA lobbyist Josh Denney. But the trade group opposes increasing the net-worth requirement for FHA-approved lenders to $1 million from $250,000."That's a pretty big jump" for small independent mortgage bankers, Mr. Denney said. MBA supports increasing the net-worth requirement to $500,000.In another risk reduction move, FHA has reduced the loan proceeds that borrowers can receive from an FHA-insured reverse mortgage by 10%, which lessens FHA risk exposure at the cost of tens of thousands of dollars no longer available to seniors on these loans.The 10% reduction on FHA-insured Home Equity Conversion Mortgages goes into effect on Oct. 1. Lenders that can get an FHA case number by Sept. 30 will be able to spare their clients from the cut.To get a case number for a HECM, the lender has to provide FHA with a certificate that the borrower has completed the agency's counseling requirements. This certificate must be signed by the senior and counselor."Counseling agencies are swamped," said Peter Bell, president of the National Reverse Mortgage Lenders Association.FHA decided to take this sudden action because the HECM program faces an estimated $800 million shortfall due to declining house prices and it's unlikely congressional appropriators will give a credit subsidy to cover this.In fact, the appropriators suggested that FHA consider a reduction in HECM proceeds."For several months, we have been working on changes to the program to improve performance and mitigate growing risk concerns," FHA commissioner David Stevens said. "We are taking prudent steps at this time to protect the viability of the HECM program."An analysis by NRMLA of the loan production by three large HECM lenders shows 21% of seniors would not be able to pay off their existing mortgage if the loan proceeds are reduced by 10%.For seniors that need a reverse mortgage to remain in their home, this means they might have to sell or face possible foreclosure.