As published in Scotsman Guide's Residential Edition, May 2010.
Just before we wrapped up production of this month’s Scotsman Guide, the Federal Housing Administration (FHA) announced its long-rumored change to lender-net-worth requirements.
As per its April 5 press release (sctsm.in/FHAnet1) preceding the regulations themselves, FHA is increasing the net-worth requirement for its approved lenders to $1 million from $250,000, the level it had set since 1993. Lenders currently FHA-approved have one year from the date of the rule to meet the requirement; within three years, the minimum increases to $1 million plus “1 percent of total loan volume in excess of $25 million.” FHA small-business lenders’ net-worth requirement will be $500,000.
More important for mortgage brokers, the rule also shifts broker oversight from FHA to lenders. To originate FHA loans after Jan. 1, brokers must work with an FHA-approved lender. FHA approval of individual originators will be history.
As FHA Commissioner David H. Stevens told us this past January, “FHA does not have the resources to monitor thousands of mortgage brokers and ensure that they’re manufacturing loans appropriately.”
It’s a matter of risk management -- something Stevens has publicly stated deserves FHA’s attention. After all, five years ago, FHA accounted for only 2 percent of all originations. When it reopened the floodgates following subprime’s collapse, well, the flood totally came. As critics such as New York University professor Andrew Caplin (Q&A) have argued, FHA might actually be more underwater than it thinks.
With FHA’s solvency hanging in the balance, two schools of thought have emerged regarding the FHA-approval move. On one hand, placing wholesale lenders as brokers’ FHA gatekeeper inevitably will keep some folks out in the cold. Joining them will be the less-capitalized lenders unable to claim the new net worth.
On the other hand, industry headlines greeted FHA’s early April change as indication of FHA “going easy” on third-party originators. In a way, FHA did remove another barrier to entry -- the expensive annual audit for independently approved originators. Whether that will have the net effect of increasing the number of FHA mortgage brokers, as FHA states, or simply making them privy to the nonstandardized whims of individual lenders -- rather than the standardized whims of government -- will be a concern worth noting through this time next year.