Although getting rid of the bad actors in the mortgage business is a good thing, customers can expect ever increasing difficulty in getting approved for a mortgage and also higher costs and interest rates as many good loan officers are driven out of the business along with the bad.

Here is the full text of the news release:

Here is the complete text of the statement. I have bolded some of the more interesting sections:

“After touring the country and talking to lenders over the past few weeks, I think it is important to take a moment and emphasize to all lenders the important role they play in this housing market, particularly in their role as responsible stewards of underwriting quality loans that will perform sustainably over time. In some cases I am seeing activities that reflect an over exuberance in the marketplace to find ways to increase loan origination revenues. Some may say it’s only “a few opportunistic lenders,” while others may say it’s a more widespread trend. It is our job at FHA to ensure that the FHA portfolio is not impacted by dangerous lender behavior that could threaten the safety of a financially sound, viable program for decades to come. Therefore, I want to be very clear on FHA’s position as it relates to underwriting, lender accountability and affordable programs.

Quality underwriting is not only essential; it is expected. Every lender engaging in business with FHA is expected to perform and maintain quality underwriting standards. FHA has flexible guidelines in place so we can best serve our mission of providing affordable housing opportunities to American families and be a source for insuring the availability of mortgages in a time of market contraction. We delegate that responsibility to you, our lender partners, each and every day. We expect your organization to have the right people and processes in place to make quality underwriting decisions, perform thoughtful analysis of a borrower’s ability to repay the loan, and adhere to realistic underwriting ratios.

We know that in today’s economy, there are a wide range of applicant profiles. We expect you to ensure that your processes and staff are well-equipped to assess the overall quality of the loan, determine a realistic income level and analyze the borrower’s true ability to repay the loan. It is imperative we look at income levels, credit history, and qualifying ratios realistically and make decisions responsibly.

To ensure that our partners perform the quality underwriting we expect, we have refined and re-tooled our loan level review processes to more effectively spot unsatisfactory underwriting performance. Utilizing updated risk targeting criteria and a collaborative approach, we are executing an enhanced strategy to identify underwriting deficiencies and take action to protect FHA from unwarranted risks and losses. This comprehensive and calculated risk management endeavor will permit us to single out those lenders that are needlessly endangering FHA and the continued availability of its programs.

FHA’s loan level review processes have been enhanced to more effectively manage risks and minimize losses arising from poorly underwritten or fraudulent loans. Processes have been modified and aligned across all Single Family offices to achieve a collaborative and comprehensive approach to evaluating loans throughout the loan lifecycle. For Post-Endorsement Technical Reviews, case selection criteria have been revised and review procedures enhanced and standardized. For lender and servicer reviews, the targeting tools and methodology have been strengthened to better target lenders and loans that pose the greatest risks to FHA.

And, as FHA continues to increase our quality control efforts, we are paying close attention to areas where some may try to take unique advantage of the flexibility of FHA without the appropriate focus on quality. One example is in how loans are originated for our non-FHA to FHA refinanced loans. Even with our FHA streamline refinance program we can identify risk simply by looking at the original loan quality before it was refinanced into an FHA loan. Through this process of reviewing the original loan we can ensure that it was a quality loan and one of FHA caliber.

Affordable products are core to FHA serving its mission. FHA plays a critical role in the market. Not only does FHA help to stabilize the housing recovery by providing liquidity at a much needed time, but FHA, as a mission driven organization, also has a goal to provide affordable homeownership opportunities in America. We want to make sure those who buy a home today, buy a home they can keep over the long term.

Our affordable lending programs and those specifically created to help during the housing crisis, such as Hope for Homeowners, are designed to provide flexibility to serve this unique, often distressed segment of the population. We expect you to maintain the spirit and intention of these programs by providing close control over how these programs are executed in the marketplace and how compensation on these loans is paid to your staff. We need to learn from past lessons and protect consumers from behaviors where they are overcharged or adversely selected. We are paying close attention to how these programs are administered and expect you will too. Lenders must keep very close control over compensation programs to ensure borrowers are not paying more than they should to have access to FHA’s affordable programs.

We have to join together to oppose predatory lending, fraud, and irresponsible business practices that threaten the housing industry and the financial security of homeowners and people trying to save for retirements. We have to create a climate of trust and confidence that will attract investors and free liquidity. If we are wise now, the market will be healthier and more secure in the future.

Our goal must be nothing less than to craft a solid, sustainable housing market, a market with a secure foundation based on trust and integrity for the future. Let’s continue to work together.”

Let’s hope that this effort is successful in helping FHA continue to remain strong and viable.

• The first proposal is that FHA require a minimum credit score of 580 in order to eligible for maximum financing, and that no scores lower than 500 be accepted at all. Borrowers with credit scores between 500 and 579 would be required to make a 10% minimum down payment.

In my opinion this change would have very little meaning in the real world outside the bureaucracies. Lenders have already implemented very similar guidelines.

As I have expressed on these pages in the past, excessive reliance on credit scoring is a huge factor in the mortgage industry crash over the last few years. Credit scores were created to predict consumer credit outcomes and aren’t the great predictors of mortgage success that some would have you believe. I believe that credit scores and automated underwriting are too often used as crutches to speed up underwriting and avoid real analysis of the credit risks particular to individual loans. However, the industry is too far down this road to turn around now.

• The second proposal is to reduce the allowed seller contributions from 6% to 3%.

The rationale behind this change is that appraisals are inflated to cover the difference. This might have been the case at some point in the past, but the idea is almost silly today with all the incredible scrutiny that appraisals now go through. This would only serve to either a) stop some good borrowers from buying at all because they don’t have the extra funds available, or more likely b) put more borrowers with limited reserve funds into homes, thus making the whole transaction more of a risk. Why add something else to slow down the market when the change will likely create more risk instead of less.

• The third proposal is to “Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.”

I am quoting all of that exactly because I don’t really understand what it means! I was under the impression this was already the thought process underwriters were supposed to be using.

I’m sure the trouble has been that bad underwriters regularly make the decision blindly that a particular number of compensating factors from the official list are all that is needed for approval rather than a real analysis of the credit profile. As noted above, I would prefer to drop all the credit scoring and automated underwriting and use this common sense old style rule.

Has anyone thought to just crack down on the underwriters making bad decisions rather than trying to leave it up to a bureaucrat with 20/20 hindsight to second guess which factors were more predictive for that particular loan? More than likely this particular rule is geared to leave HUD an out to avoid paying claims by citing violations of this rule. My opinion is that the uncertainty involved here will create an atmosphere in which underwriters overcompensate and more loans get turned down.

Bottom line, the simplest solution to all of this would be to crack down hard on lenders with high default rates. Judge everyone by their results and let the lenders themselves decide how they are going to underwrite. Quit trying to have bureaucrats micromanage things. There isn’t anything in the world a bureaucrat does better than someone in the real world.

Here is the website where you can make your comments until August 13, 2010.

FHA recently issued ML 2010-20 which provides an overview of key provisions of HUD’s final rule referenced above, and provides guidance to mortgagees on HUD’s implementation of this final rule. This rule increased the net worth requirements for FHA-approved mortgagees, eliminated FHA approval of loan correspondents, codified requirements of the Helping Families Save Their Homes Act of 2009 (Public Law 111-22), and made minor modifications to other aspects of FHA’s regulations governing lender activities.  After a brief overview of the new policy decisions, FHA staff will field questions from callers.

The call is scheduled for Tuesday, 6/29/2010 at: 2:00 pm eastern time.

The call-in number is (866) 207-0413

The conference id number is 84423109

Because there are a limited number of lines associated with this call, we encourage industry groups and lenders to call in from a central location.

You can view a copy of ML 2010-20 online at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

A copy of Final Rule FR 5356-F-02 can be viewed at: http://edocket.access.gpo.gov/2010/pdf/2010-8837.pdf

The FHA Streamline Refinance program has helped many borrowers lower their interest rates and housing payments. FHA has long held the view that decreasing a borrower’s monthly payment should be a good thing and very easy to accomplish as long as the borrower has been making their payments on time. After all, if the borrower is already making the payments and FHA has already insured the mortgage either way, then why be picky about the details. Thus, the FHA streamline refinance process has always been an easy one.

Unfortunately, as we hear so commonly in the mortgage business today, the times are changing. In response to today’s economic climate and increasing defaults on FHA, FHA streamline refinance requirements were tightened considerably at the beginning of 2010.

Here are the highlights of the primary changes:

1. FHA borrowers must now be employed at the time of application
2. Any cash needed to close must be fully verified
3. If the borrower needs to “roll in” any closing costs at all to their loan amount, then the lender must have a full appraisal done
4. Borrowers must now have made at least 6 payments on their loan before refinancing
5. There must be a specifically allowed net tangible benefit to the borrower.

Keep in mind that lenders are also allowed to tighten up these guidelines even further, and many have. An FHA streamline refinance is still only insured by FHA. FHA is not the lender. So before you commit to an FHA streamline refinance, be sure to obtain quotes from different lenders and realize that the guidelines may be different for different lenders.

Following are the exact details of all the changes:

Revisions for ALL Streamline Refinance Transactions

Seasoning: At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.

Payment History: At the time of loan application, the borrower must exhibit an acceptable payment history.  For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due. For mortgages with a 12 months payment history or greater, the borrower must have experienced no more than one 30 day late payment in the preceding 12 months, AND made all mortgage payments within the month due for the three months prior to the date of loan application.

Net Tangible Benefit: The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal.  Net tangible benefit is defined as:  a) reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens), b) refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage, OR c) reducing the term of the mortgage.

Reduction in Total Mortgage Payment:  The new total mortgage payment is 5 percent lower than the total mortgage payment for the mortgage being refinanced.  Example:  Total mortgage payment on the existing FHA-insured mortgage is $895; the total mortgage payment for the new FHA-insured mortgage must be $850 or less.

This requirement is applicable when refinancing from a Fixed Rate to Fixed Rate, from an ARM to ARM, from a Graduated Payment Mortgage (GPM) to Fixed Rate, from GPM to ARM, from a 203(k) to 203(b) and from a 235 to 203(b).

Fixed Rate to ARM:  Fixed rate mortgages may be refinanced to a one-year ARM provided that the interest rate on the new mortgage is at least 2 percentage points below the interest rate of the current mortgage.

ARM to Fixed Rate:  The interest rate on the new fixed rate mortgage will be no greater than 2 percentage points above the current rate of the one-year ARM.  For hybrid ARMs, the total mortgage payment on the new fixed rate mortgage may not increase by more than 20 percent .  Example:  total mortgage payment on the hybrid ARM is $895; the total mortgage payment for the new fixed rate mortgage must be $1,074 or less.

Reduction in Term:   For transactions that include a reduction in the mortgage term, that loan must be underwritten and closed as a rate and term (no cash-out) refinance transaction.

Investment Properties/Secondary Residences:  In addition to meeting the requirement for a reduction in the total mortgage payment, investment properties or secondary residences are not eligible for streamline refinancing to ARMs.

Certifications and Verifications: When submitting the loan for insurance endorsement, the lender must include a signed and dated cover letter on their letterhead certifying  that the borrower is employed and has income at the time of loan application. If assets are needed to close, the lender must verify and document those assets. The lenders must also include the pay-off statement in the case binder.

Credit  Score: If a credit score is available, the lender must enter the credit score into FHA Connection.  If more than one credit score is available, lenders must enter all available credit scores.

Maximum Combined Loan to Value: If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent. For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

TOTAL Scorecard: Lenders should not use TOTAL on streamline refinance transactions.  However, lenders may score streamline refinances through TOTAL and still process and underwrite the loan as a streamline refinance transaction if doing so is in the borrowers’ best interest.

Uniform Residential Loan Application (URLA): Mortgagees may no longer use an abbreviated version of the URLA.  The application for mortgage insurance must be signed and dated by the borrower(s) before the loan is underwritten.  Mortgagees are permitted to process and underwrite the loan after the borrowers and interviewer complete the initial URLA and initial form HUD-92900A, HUD/VA Addendum to Uniform Residential Loan Application.

Revised Streamline Refinance Transactions WITHOUT an Appraisal

The maximum insurable mortgage cannot exceed: The outstanding principal balance  minus the applicable refund of the Upfront Mortgage Insurance Premium, PLUS The new UFMIP that will be charged on the refinance.

Revised Streamline Transaction WITH an Appraisal

The maximum insurable mortgage is the lower of: 1) The outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance; OR 2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance. Discount points may not be included in the new mortgage.  If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.

Unchanged Streamline Refinance Rules

The following on streamline refinance transactions remains unchanged:

• Maximum mortgage limits and maximum mortgage term
• Streamline Refinances for investors/secondary residences
• Cash back at closing
• Permissible geographic areas
• Appraisals
• HUD LDP and GSA exclusion lists
• Credit Reports
• Credit Qualifying [except maximum insurable mortgage]
• Holding period for assumed loans
• Adding/Deleting Borrowers
• Withdrawn Condominium Approval
• Seven Unit Limitation
• No Cost Refinances
• 203(k) to 203(b) [completion of rehabilitation]
• 235 to 203(b) [overpaid subsidy and junior liens]

As proposed in a November 30, 2009, proposed rule (74 FR 62521), HUD is seeking to eliminate FHA approval for loan correspondents. Because this rulemaking is still in process and a final rule has not yet been issued, FHA is extending the deadline for the submission of audited financial statements for loan correspondents seeking renewal of their FHA lender approval for 2010. For loan correspondents with a fiscal year end of December 31, and that would ordinarily be required to renew their FHA approval by March 31, 2010, HUD is providing these lenders with an additional 30 days in which to submit their audited financial statements. These loan correspondents must continue to comply with existing requirements for the submission of their Annual Certifications and renewal fees, but will be given until April 30, 2010, to submit audited financial statements. Again, the deadline for the submission of the Annual Certification and renewal fee has not been changed. Loan correspondents that do not complete their renewal in accordance with the deadlines as specified above will no longer be FHA-approved as of the effective date of the final rule that follows the November 30, 2009, proposed rule.

Here are some of the details of the crackdown:

“FHA takes its oversight role very seriously and will move swiftly and decisively to protect borrowers from unscrupulous lenders,” said FHA Commissioner David Stevens. “Any lender who refuses to comply with FHA requirements will simply no longer enjoy the privilege of participating in FHA programs.”

WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
   • The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
   • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
   • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
   • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
2. Update the combination of FICO scores and down payments for new borrowers.
   • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
   • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
   • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
3. Reduce allowable seller concessions from 6% to 3%
   • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
   • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
4. Increase enforcement on FHA lenders
   • Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
     • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
   • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
     • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
     • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
   • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
     • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
   • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
     • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
     • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.

Important FHA notice for all mortgagees:

Delayed Implementation Date for New Requirements in ML 2009-28

Enactment of ML 2009-28, Appraiser Independence, will be delayed until February 15, 2010. ML09-28 (originally planned for a January 1, 2010 implementation) has two parts:  a) prohibition of mortgage brokers and commission-based lender staff from the appraisal process, and b) appraiser selection in FHA Connection.  The effective date for both sections of this guidance will now take effect for all case numbers assigned on or after February 15, 2010.  This extension will provide FHA and lenders additional time to adjust systems to accommodate the changes.

Detailed instructions on changes to FHA Connection will be issued in a new mortgagee letter. However, lenders should be aware that the requirement for inputting the appraiser ID and the appraisal assignment date in the FHA Connection case number assignment screen will be removed.  Instead, lenders will be required to enter all appraisal data, including the appraiser ID, in the Appraisal Update Screen once the completed appraisal is received by the lender and prior to closing the loan.

Delayed Implementation Date for ML 2009-51

ML 2009-51, Adoption of the Appraisal Update and/or Completion Report, states an effective date of January 1, 2010. The effective date is being extended and will now apply to all case numbers assigned on or after February 15, 2010. This extension will provide additional time needed by FHA and lenders to adjust their systems to accommodate use of the form.