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One of the byproducts of the housing crash was that many of the large commercial Banks discontinued offering FHA insured mortgage loans.
In fact, at present, only two of the big guys are still originating under the FHA program; Wells Fargo and Flagstar? Both also offer a huge correspondent loan program allowing many non-bank lenders to originate these loans as well.
The problem is that the cost to originate and service FHA loans is on the rise. This is the result of the new stricter FHA rules and regulations, the required loan, and annual certifications, and the threat of False Claims Act actions by the Department of Justice.
The latter being a major factor in the Bank’s pullout. After the crash, many of the big banks which had worked with FHA to increase homeownership to its highest levels got slapped with fines and penalties as their reward.
When things started to recover these banks said no thank you to FHA. Too much risk and we don’t like the rewards. With that, the role of FHA originations went to the non-bank mortgage lenders. The banks say this is risky for those lenders, as well as FHA.
When the spit hit the fan in 2008, many of those who contributed to the problems walked away without a scratch. They got out while the getting was good, leaving the banks and other large non-bank lenders to pay the freight.
Now, the fear is that if we hit another downturn, many of the current non-bank lenders may not be in a position to handle the fines and penalties that may be assessed by DOJ and FHA.
If not, these lenders will be forced out of business and the FHA insurance fund will take a major hit. Not good for anybody!
Coupled with the increased risks and costs associated with originating FHA loans, there are fewer outlets for loan servicing. Because of the rise in servicing expenses, today more than half of the top ten non-bank FHA servicers are either for sale, in bankruptcy, or on the verge of going out of business.
Something needs to be done to provide lenders with more certainty surrounding the risks of FHA originations. Otherwise, it’s not just the big banks that will stay away.
In a tight market, in return for increased business and income, the non-bank lenders have stepped into the shoes of the big banks, but not without taking on some major risk.
For now, this is good for them and for the FHA borrowers, they continue to serve. But, what happens if the tide turns? Can they weather the storm? Are they taking the right steps today to carefully originate good quality, compliant loans that meet all FHA requirements? I sure hope so.
To protect themselves, FHA lenders need to have a strong pre and post close QC program to quickly identify defects and potential problems, with action plans to ensure corrections. Otherwise, they may find themselves on the wrong end of a DOJ False Claims Action or FHA fines and penalties.
Maybe both, and that ain’t good for anybody.
