• November 1 2010
• Patton Boggs

Sources with close ties to the Federal Housing Administration (FHA) are saying that the agency is likely to soon begin taking steps to address faulty foreclosures of FHA-insured mortgages as a result of the recent foreclosure furor. Significant action is expected against FHA-approved mortgagees and mortgage servicers who did not follow FHA’s prescribed loss mitigation requirements and foreclosure procedures. The Department of Housing and Urban Development (HUD) has already taken a more vigorous enforcement approach over the last several months and has apparently been galvanized into action on the foreclosure front by the wave of publicity about improper foreclosure procedures. If it intends to come down heavily on FHA-approved mortgagees/servicers, it has the means to do so.    

HUD’s Mortgagee Review Board (MRB) will likely be the principal instrument of any assault on faulty foreclosures of FHA-insured loans. The MRB has been much more active under this Administration and now will probably wade into the foreclosure crisis. It can impose probation, suspension or termination (withdrawal) of FHA approval as sanctions on erring mortgagees and servicers. In addition, it has the authority, which it frequently uses, to collect civil money penalties from mortgagees/servicers for violations of HUD regulations and guidance. Presumably, HUD could take even more serious action outside the MRB’s scope if it discovers major misconduct, such as fraudulent filings.

Mortgagees who service FHA-approved mortgages should be concerned about the likelihood of FHA action. Loss mitigation and foreclosure procedures and case files of foreclosures should be carefully reviewed.  

Today, the Senate Banking, Housing and Urban Affairs Committee held a hearing entitled “The Federal Housing Administration—Current Condition and Future Challenges” to assess the adequacy of the capital reserve fund of the Federal Housing Administration (FHA) following its decline below the statutorily-imposed limit, and to discuss proposals for reform within the FHA.    

Testifying before the Committee were the following witnesses:

Panel 1

• David H. Stevens, FHA Commissioner and Assistant Secretary for Housing, U.S. Department of Housing and Urban Development
• Matthew Scire, Director, Financial Markets and Community Investment, Government Accountability Office (GAO)

Chairman Christopher J. Dodd (D-CT) opening the hearing by discussing the widespread presence of the FHA in the housing and home financing markets, noting that assistance by the FHA loans accounted for half of all recent home purchases and half of refinancing activity. “The federal government now stands behind 90% of all mortgages in the country,” he stated.

The FHA currently is required to maintain secondary reserves of at least 2% of the total amount of the outstanding U.S. home mortgages it insures. The capital reserve fund is a secondary, surplus fund created by Congress in 1990 to provide an additional capital cushion for the FHA in times of economic turmoil. Mr. Stevens began his testimony by discussing this reserve requirement and noting last year’s decline in FHA’s capital reserve ratio below the statutory threshold. He also noted that although net budgetary actual performance is in line with the President’s budget presented in February, “our actual performance to date has been significantly better than predicted by the actuary.” He attributed this better-than-expected performance to the policy changes adopted by the FHA during 2010. He explained that the increased presence of the FHA in the housing and home financing market noted by Chairman Dodd came at a price—namely the capital reserve fund shortfall. Mr. Stevens reiterated the two- to three-year estimate made last year of when the required 2% capital reserve ratio would be reached. “2007 and 2008 were terrible books that were originated with limited scrutiny,” he noted, warning “we are absolutely not out of the woods.” He also warned against adopting a rigid timeline for compliance with the statutory reserve requirement. “I believe a timeline would be the wrong way of approaching the FHA reform. To be clear, we shall do everything he can to get it back to 2%. Those steps are in process,” Mr. Stevens said.

Mr. Stevens also stated that certain proposals adopted by FHA, including increased down payment requirements for borrowers with lower credit scores and tightening the minimum credit score for borrowers with lower down payments, had resulted in the average credit score for FHA-insured mortgages rising from 634 in 2007 to nearly 700 today. He also voiced support for a Senate bill designed to strengthen FHA’s tools to manage risk and protect the FHA capital reserve fund. The bill would allow third-party FHA loan originators to close those loans in their name and would allow the FHA to hold them accountable for any detected misrepresentation or fraud. “FHA remains committed to working with Congress to enact the full breadth of reforms” proposed by the bill, Mr. Stevens said.