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HUD Issues Three Mortgagee Letters
On August 15, HUD issued three mortgagee letters to announce various changes related to the origination of FHA-insured mortgage loans. Effective for case numbers assigned on or after October 15, 2013, Mortgagee Letter 2013-24 (i) sets forth documentation requirements for conducting credit analysis of collections and judgments, (ii) requires a specified capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000, (iii) details the required treatment of judgments, and (iv) revises the FHA’s policy on manual downgrades for applications with disputed accounts to reflect the risk associated with derogatory and non-derogatory disputed accounts for factors such as age and size of outstanding balance. In Mortgagee Letter 2013-25, HUD updates FHA’s TOTAL Mortgage Scorecard User Guide to reflect the changes announced in Mortgagee Letter 2013-24. Finally, Mortgagee Letter 2013-26 loosens eligibility requirements for certain borrowers adversely impacted by the recession. Specifically, the letter allows for the consideration of borrowers who have experienced a loss of employment or income, or a combination of both, and can document that: (i) certain credit impairments were the result of a loss of employment or a significant loss of household income beyond the borrower’s control, (ii) the borrower has demonstrated full recovery from the event, and (iii) the borrower has completed housing counseling.
HUD Defendants Enter Unopposed Motion to Stay Challenge to Disparate Impact Rule
On August 15, the defendants to an action initiated by two insurance trade groups challenging the HUD rule authorizing “disparate impact” or “effects test” claims under the Fair Housing Act entered an unopposed motion for a stay of proceedings pending the outcome of the U.S. Supreme Court’s decision in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507. In requesting the stay, the defendants argue that the Mt. Holly appeal turns on the “same issues of statutory interpretation” presented by the trade groups’ challenge to the HUD rule; that is, whether a disparate impact theory of liability is cognizable under the Fair Housing Act.
HUD Explains Wait and See Approach to Eminent Domain Plans
On August 12, HUD responded to a congressional inquiry about plans announced by certain localities to seize mortgages via eminent domain and potentially refinance them through the FHA. HUD states that while it is concerned about the potential eminent domain actions threatened by some localities, including most recently and aggressively by Richmond, California, HUD also recognizes the “inherent and often indispensable tool” that eminent domain can be for local government to implement public policy. HUD suggests that disputes over this novel proposed use of eminent domain may be a question for the courts and states that, pending further legal and other developments, it does not know whether any new mortgage created out of a seizure would qualify for FHA insurance and cannot currently assess the impact of the seizure of mortgages on the FHA and the broader mortgage market.
Congress Passes Reverse Mortgage Legislation; Senate Banking Committee Approves Broader FHA Reform Legislation
On July 30, the U.S. Senate passed by unanimous consent the Reverse Mortgage Stabilization Act, H.R. 2167. The bill, which was passed by the House in June and now goes to the President for his signature, will allow HUD to use notices or mortgagee letters to establish additional or alternative requirements necessary to improve the fiscal safety and soundness of the Home Equity Conversion Mortgage (HECM) program.
On July 31, the Senate Banking Committee voted 21-1 to approve the FHA Solvency Act of 2013, S. 1376, as amended during committee markup. As previously reported, that bill also includes reverse mortgage provisions, as well as measures to more broadly reform the FHA. The bill as approved by the committee includes amendments that would, among other things, (i) provide that in addition to the principal dollar amount limitation on all insured HECM loans, fixed rate HECMs may not involve a principal limit with a principal limit factor in excess of .61, (ii) allow HUD to promulgate rules to require servicers of FHA loans to enter into a subservicing arrangement with any independent specialty servicer approved by HUD, and (iii) prohibit FHA from insuring a mortgage executed by a borrower who was the borrower under any two residential properties that have been previously foreclosed upon. In addition, during the markup committee members offered and then withdrew numerous amendments that later could be included in the bill that is considered by the full Senate. For example, those amendments would (i) create a statutory requirement that HUD/FHA repay Treasury for any funds needed to stabilize the MMI Fund, (ii) revise the indemnification provisions to provide certainty for lenders, and (iii) provide the FHA additional flexibility in times of financial crisis to ensure it can play a countercyclical role. Finally, committee members agreed to work with the FHA to expand loss mitigation options for individuals who receive income from sources other than employment.
Housing Finance Reform Bills Advance in Congress
On July 24, the House Financial Services Committee approved a comprehensive housing finance reform bill, outlined recently by Committee Chairman Jeb Hensarling (R-TX). The Chairman has indicated that the bill could move to the House floor for consideration by the full body shortly after the August recess and that in the interim he will work to explain the bill to his conference and build support. The House bill differs in several substantial ways from a Senate proposal. For instance, the House bill provides for an overhaul of the Federal Housing Administration while the Senate Banking Committee intends to address the FHA separately from, and in advance of, the Senate’s broader housing finance reform bill. The Senate Banking Committee held a hearing this week on its FHA legislation and intends to amend and vote on the bill next week.
Senate Banking Leaders Offer Bipartisan FHA Reform Bill
On July 15, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released a discussion draft of a bill intended to improve the solvency of the FHA’s Mutual Mortgage Insurance Fund (MMI Fund). As with legislation recently passed by the House, the bill would allow HUD to manage its HECM program through mortgagee letters. Unlike the House bill, this draft further would require that, whenever HUD issues a HECM mortgagee letter, it also initiate a proposed rulemaking that addresses the subject of the mortgagee letter. The bill also would require that, for a mortgage to be eligible for insurance under the HECM program, the mortgage must contain terms and provisions for ensuring property maintenance, establishing escrow accounts, performing financial assessments, or limiting the amount of any payment made available under the mortgage.
In addition, the bill includes changes to the broader FHA insurance program, including provisions similar to those in a bill passed by the House last year with overwhelming bipartisan support. It would, for example, (i) set a minimum annual mortgage insurance premium of at least 55 basis points and increase existing up-front and annual premium caps by 50 basis points, (ii) direct HUD to establish underwriting standards using criteria similar to the CFPB’s criteria for Qualified Mortgages, and (iii) require that the MMI Fund achieve a capital reserve ratio of 3% within 10 years of enactment and establish escalating reporting requirements and program evaluations that take effect immediately if the capital ratio falls below required levels. Further, the bill would, among other things, (i) enhance HUD’s ability to seek indemnification from FHA-approved mortgagees approved to originate loans under the lender insurance program or the direct endorsement program, (ii) expand the criteria HUD uses to compare mortgagee performance and to allow HUD to terminate a mortgagee’s approval on a national basis, and (iii) require HUD to develop a single resource guide for lenders and servicers regarding the requirements, policies, processes, and procedures that apply to loans insured by FHA.
The committee has scheduled a legislative hearing on the bill for July 24, 2013.
New York Financial Regulator Issues Guidance on Determination of Subprime Home Loans Under State Law
On July 3, the New York Department of Financial Services (DFS) sent a letter to regulated institutions and issued a temporary order relating to the determination of thresholds for “subprime home loans” under Section 6-m of the New York Banking Law. Due to recent increases in interest rates, many lenders who utilize a loan’s closing date as the time period for determining the “fully indexed rate” feared that they may be originating loans that meet the definition of subprime home loans under Section 6-m. The letter reminds lenders that in 2009, DFS amended Section 6-m of the Banking Law to instruct lenders to use the date that they provide good faith estimates to borrowers as the date for calculating the “fully indexed rate.” The letter also states that the DFS believes that calculating the “fully indexed rate” properly should allay many lenders fears that they may be triggering Section 6-m. Relatedly, recent changes to the calculation of Mortgage Insurance Premiums mandated by the FHA in Mortgagee Letter 2013-04 has increased the annual percentage rate on subject loans and is causing them to fall under Section 6-m’s definition of subprime home loan. To address the issue, the DFS issued a temporary order that, for 60 days from the date of the order, directs lenders not to use the MIP changes effectuated by FHA when calculating the APR and fully indexed rates for purposes of Section 6-m.
HUD Seeks Comments on Potential Changes to FHA's Quality Assurance Process
Recently, HUD published a notice seeking public comments on “ways to improve the efficiency and effectiveness” of FHA’s quality assurance process (QAP). In the notice, HUD explains that it is seeking to enhance its oversight of FHA single-family lenders by evaluating single family quality assurance alternatives that would better align with FHA’s mission. Specifically, HUD aims to ensure that it maintains and improves a quality assurance framework that (i) does not hinder or dissuade lending to FHA-targeted populations; (ii) enhances the efficiency and effectiveness of the QAP; (iii) ensures compensation to FHA for defects resulting from the lender manufacturing process; and (iv) applies fairly to all lenders. In addition, HUD also endeavors to establish a framework that ensures that loans are reviewed within a reasonable time period, post-endorsement; in order to allow FHA to use loan quality findings to improve credit policy and to allow lenders to improve their FHA origination practices. HUD particularly seeks public comments on (i) the types of loan manufacturing or compliance defects found in the QAP that should be subject to indemnification or other administrative remedies or a combination of responses; (ii) how the FHA’s review and comparison of early defaults and claims may achieve an improved assessment of a mortgagee’s performance – for example, HUD is considering establishing a specific standard of defaults and claims which mortgagees should not exceed within a given construct; (iii) whether FHA should establish a threshold manufacturing (or loan deficiency) risk tolerance; and (iv) whether FHA should establish a process to review a statistically significant random sample of loans for each mortgagee within a prescribed time frame after loan endorsement to estimate defect rates. Comments on the potential changes are due by September 9, 2013.
House Chairman Outlines Housing Reform Bill
On July 11, House Financial Services Committee Chairman Jeb Hensarling (R-TX) outlined legislation set to be unveiled next week that is designed to reform the housing finance market. The centerpiece of the comprehensive bill is a plan to end the government’s conservatorship of Fannie Mae and Freddie Mac over a five year period, move those entities into receivership, and liquidate them. The bill would aim to replace the government-backed mortgage finance companies with a secondary market funded only by private capital, supported by a non-government, not-for-profit mortgage market utility regulated by the FHFA. The legislation also will include numerous provisions designed to “break down barriers to private investment capital,” including by delaying implementation of Basel III capital rules for community financial institutions and incorporating portions of a bipartisan proposal to change the calculation of loan points and fees in determining qualified mortgage eligibility. Finally, the bill would separate the FHA from HUD, limit the FHA’s mission to only serving first-time homebuyers and borrowers below 115% of area median income (AMI) nationwide or 150% of AMI in high-cost areas, lower the minimum and maximum FHA loan limits, and increase FHA down payment requirements, among other changes to the FHA program.
HUD Proposes Expansion of Mortgagee Evaluation System, Clarifies Good Neighbor Sales Program Rules
On June 12, HUD proposed in Mortgagee Letter 2013-21 revisions to the system used by the FHA to measure and inform mortgagees of their loss mitigation performance. The proposed revisions involve more comprehensive metrics to evaluate mortgagees on their overall performance with regard to delinquent loan servicing, as opposed to the limited review of default reporting of forbearance actions and loss mitigation and foreclosure claims paid under the current system. HUD is seeking comments on the proposal, which are due by July 12, 2013. Also on June 12, HUD issued Mortgagee Letter 2013-20 to clarify that under its Good Neighbor Next Door Sales Program, which enables eligible participants to purchase at a discount certain designated properties, (i) the mortgage insurance premium is based on the first mortgage only and (ii) the process for submitting requests for an interruption in the owner-occupancy term.