Justin Burch of HUD’s, Office of Lender Activities and Program Compliance, was the Presenter on HUD/FHA’s Quality Control Update Webinar which covered a variety of topics. Outlined below are some of the major topics discussed:
- HUD expects to insure a little more than 1 million FHA loans in Fiscal Year 2015 (Oct. 1, 2014 through Sept. 30, 2015) which will be a substantial increase over 2014 levels. This is attributed to the reduction in Mortgage Insurance Premiums.
- There has been a 30% drop in serious delinquency rates on FHA loans and a 63% reduction in foreclosure rates.
- HUD’s “Supplemental Performance Matrix” was launched on August 17, 2015. Lenders are encouraged to access the Neighborhood Watch system in order to be aware of their overall Compare Ratio as well as their “Mix-Adjusted Serious Delinquent & Claim Rate” and weighted Compare Ratio which considers the performance & volume of loans originated in three separate categories (credit scores below 640, scores between 640 & 680 and scores above 680.
- Revisions to HUD’s Form 92900-A (Loan Certification) are being proposed which involve the following: pre-endorsement reviews, prohibited activities for those directly involved with borrower/loan and removal of clauses dealing with lender-level issues. The comment period for these proposed revisions ended on October 1, 2015.
- An outline was provided of HUD’s draft “Defect Taxonomy” which would replace their current process of rating cases as “Deficient”, “Unacceptable” or “Conforming” as part of their QC reviews with Four Tiers of defects which will capture greater detail on the scope of the defect. This new review process is not expected to be rolled-out for 12-24 months due to the complex nature of developing new design documents & related programming.
- In Fiscal Year 2015, FHA began processing Post-Endorsement Technical Reviews (PETRs) on a random sampling of cases in addition to its risk-based selection on performing & non-performing loans. From 10/1/14 thru 7/31/15, a total of 36,224 loans were reviewed from 1,072 active lenders. Early Payment Defaults (EPDs) represented approx. 20% of the sample for this time period.
- Although close to 50% of loans reviewed had initial defects, the “Net material defect rate” is only 6.7% – a pattern that is a continuing concern to HUD/FHA staff. Since the majority of defects are resolved by the lender providing additional documentation, lenders need to perform better due diligence prior to providing loan files to FHA for review. This is a resource drain for both the lender and FHA.
- Of the loans reviewed through 4/30/15, the average FICO score was 656, the average front-end ratio was 32.3% and the average back-end ratio was 44.7%.
- The Top Five defects based on 2015 PETRs were mostly credit related. They were as follows: 1) Unacceptable, unsupported or insufficient source of funds (10.1%) 2) Concerns related to assets derived from gifts (8.5%) and 3) The obligations of borrowers omitted, inaccurate, not supported, not disclosed and/or not legible (7.9%) 4) Data integrity issues (file documentation does not support Accept/Approve decision in AUS (7.6%) and 5) Income improperly documented (7.2%).
Some future HUD/FHA initiatives include the following:
- HUD to start performing “Deeper Dives” on loans rated Deficient. Previously, only loans rated Unacceptable were the primary focus.
- Increase the number of lenders that submit Electronic Case Binders to HUD for review. Currently, approx. 80% of HUD’s endorsements are processed under the Lender Insurance (LI) program and approx. 50% of LI business involves Electronic Case Binders. HUD intends to promote both the LI program and Electronic Case Binders usage in FY 2016.
- Deployment of lender specific quarterly QC reporting with a continued focus on reducing initial defect rates.
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