Wednesday, December 02, 2009

FHA getting out of the insurance business?

A photo portrait of {{w|Shaun L.S. Donovan}}, ...
In what appears to be a move right out of the auto and health insurer's playbook (we'll charge you a fee for affordable insurance as long as you don't use it), the U.S. Department of Housing and Urban Development has asked Congress to give is some additional authority.

According to a story that ran today in National Mortgage News' Daily Briefing, Housing Secretary Shaun Donovan asked the House Financial Services Committee to consider allowing FHA to require lenders to indemnify the insurer against losses on bad loans.

For those of you not familiar with the way government-insured loans work (which appears to be a group that I might belong to), FHA and VA provide loan guarantees to lenders, insuring that if the loans go bad, the government will make the lenders whole, as long as the loan was originated in strict accordance with the agency's guidelines.

According to NMN, Donovan said: "We are asking for additional authority for our proposals to hold FHA lenders responsible for fraud and misrepresentations by indemnifying the FHA fund."

My understanding was that writing loans that are fraudulent or that have misrepresentations in the loan application or other documents was already outside of FHA's origination guidelines. Perhaps the agency just hadn't made that point explicitly before.

I think it's more likely that Donovan has been watching delinquencies in FHA loans rise and wanted to smack lenders in order to get them to tighten up their underwriting process even more. This oughta do it. It would basically be a giant loophole that renders the insurance worthless if anyone involved in the loan origination process makes a mistake, intentionally or otherwise.

When that happens, FHA wants authority to "hold lenders accountable nationally" across their entire branch network, NMN reported. They want to launch a website that can serve as a Dunce's Corner to showcase lenders that don't adequately control the quality of their FHA loan origination process.

That's a red flag to guys like me and a giant red flag wrapped around an armed nuclear weapon to a professional risk manager. We've read a lot about how FHA is the new subprime. If Donovan gets this through Congress, subprime will be ready for the history books.

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