Can a bank be a little bit wrong when making a mortgage loan? Is that like being a little bit pregnant? It seems that FHA believes so. FHA is considering some relief for lenders from actions under an ancient law known as the False Claims Act (FHA Relief).
Under their plan, a lender that originated a loan insured by FHA that later defaulted, would not be potentially liable for triple damages (three times the FHA loss) if it is found the lender made only some minor errors/mistakes when originating the loan. This begs the obvious question of what is considered a minor error or mistake and who makes the distinction?
FHA’s hope is that lenders have short memories and, in their drive to increase business and income, they’ll overlook the risks involved and expand FHA lending to many more “qualified” borrowers. This, of course, will also increase the FHA insurance fund, which may be needed as a result of the recent cut in the annual mortgage insurance premium rate.
Although FHA is considering this change, their counterparts in the government, the Department of Justice, who use this law to go after lenders and recover losses, is not sold on the idea. DOJ fears FHA is caving under pressure from lending lobbyists and would be minimizing the potential for enforcement actions available when lenders create bad loans.
Regardless, many banks and mortgage lenders may still shy away from FHA lending because the risks are a little too high and the rules a little too ambiguous. When things went bad a few years back, FHA and DOJ, and any other enforcement agency you can think of, decided that lenders had to pay for their mistakes, regardless of how small.
What’s changed now and what makes anyone believe that because FHA believes that many “worthy but weaker” (the “weaker” is what scares me a little) borrowers should get FHA loans, they won’t again go after any lender if (when) defaults and claims rise.
They did it before. Do you have confidence they won’t do it again? If so, I have bridge in New Jersey I’m trying to sell.
Please serious inquiries only…