A couple of days ago, I wrote about some unintended consequences of the increase in government regulation on mortgage lenders. Recently, more and more banks are quickly moving away from FHA lending because of what they believe to be increased risk. Increased risk from the type of borrower involved, from the new Dodd-Frank rules and from FHA certification requirements.
JPMorgan has just about eliminated all FHA lending (FHA Exodus). Other main banks are following suit. Wells Fargo recently announced they have increased the minimum credit score for FHA-insured loans from 600 up to 640. In the world of credit scores, this is a big jump. This is not good for first time and low to moderate income homebuyers. This means that it may adversely affect all borrowers up the chain. This could stymie the so-called “housing recovery.”
But wait…it appears the Independent (non-bank) Mortgage Lenders are picking up the slack. At least for now, Independents have increased their share of the FHA lending. In doing so, they have also increased their share of the risks.
What do the Banks see that the Independents do not? The risks are virtually the same; same Dodd-Frank rules, same FHA certification requirements, and the same borrowers. So, why do the Independents tread where others fear to go?
Why do Independent Lenders believe they will succeed? Maybe, it’s that great entrepreneurial spirit which has always been a driving force behind the Independents’ success. Or, is it that here lies some low hanging fruit left behind by the Banks’ exodus? Either way, Independents need to be very careful when doing this lending. The rules have changed and the stakes are high.
Problems, defects and/or rule violations may lead to severe penalties levied by CFPB, FHA and/or DOJ. This is serious business. If a lender is found to have violated FHA lending and insurance requirements, the lender may not only be fined but may also lose the privilege to originate FHA loans. That can be devastating to a lender that had modified its plans to increase their FHA business.
All the more reason you must focus on “QUALITY.” This is the keyword. Not just volume, but the origination of loans that will stand the test of time (and of course, a CFPB audit).
Unfortunately heretofore quality has been overlooked in the interest of volume and profit. No more can lenders afford to manufacture poor, defect-laden loans. This will be their death knell. It may sound a little dramatic – but it’s true. Investing the money and time to train staff, implement systems and review loans to ensure quality and compliance will pay a lender huge dividends.
An opportunity now exists for Independent Lenders to increase their FHA business. They can also make inroads with customers, being consumers, realtors and builders, to also get a crack at more conventional business. They must be compelled that any business is done the right way to ensure quality, compliance and loan performance.
I don’t know if the Banks’ strategy to exit FHA lending is the right move, but I do know it presents some good opportunities with increased challenges for Independent Lenders. How they originate these loans and meet these challenges will determine their success.
Trash or treasure; it’s all up to you.