FHA to Require Banks to Police Mortgage Brokers

We may be heading right back where we came from.

The Federal Housing Administration announced ground breaking changes for insuring home mortgages originated by banks and mortgage brokers.

Proposed changes could find lenders reviving the bad old days of mortgage lending in Black and Hispanic communities.

Could we see a return to redlining by lenders in the name of risk management?

FHA transforms into the SEC

Beginning May 20th 2010, financial institutions that underwrite and fund FHA Loans, will be required to oversee the activities of Mortgage Brokers to insure compliance with FHA underwriting guidelines.

By restructuring it’s regulatory oversight of lenders and third party originators, FHA has decided that Banks funding FHA insured mortgages will be required to sponsor each mortgage broker they underwrite FHA Loans for.

The HUD agency has seen it’s role in the residential mortgage market grow from just 2% in 2006, to now accounting for 1/3 of all existing mortgage loans.

Responsibility for certifying and approving lenders and third party originators for underwriting and FHA insured loan products drained agency resources.

After raising it’s loan limits in 2007, FHA witnessed explosive growth in applications from mortgage banks and mortgage brokers requesting approval to package and underwrite FHA loans to the home buying public.

However, after approving 9,043 mortgage brokers in 2009, up from 5,759 in 2007, FHA was rendered incapable of overseeing the activities of each approved mortgage broker nationwide.

Banks ever increasing powers

Where chaos exists, opportunities abound.

And as banks await guidelines for sponsoring and overseeing mortgage brokers, FHA Commissioner David Stevens issued his final ruling on strengthening risk management through responsible FHA approved lenders.

Which means that any and all Congressional committee and sub committee hearings and testimony have concluded on the matter and the ruling issued by the Commissioner will serve as the basis for a new regulatory environment.

An environment that will ultimately resemble Wall Street investment bank’s sponsoring registered representatives as securities dealers, and the self regulation permitted by the SEC.

Is there cause for concern?

I do believe there’s reason to be vigilant.

Risk can be defined in vague terms when it comes to reducing mortgage fraud.  The sales recording process in New York City wouldn’t surface mortgage fraud for years, with the majority of all cases before the court evidencing its actual occurrence some 5 to 7 years in the past.

What’s worst is that there wouldn’t be cause to suspect a crime has been committed if a homeowner didn’t default on their existing mortgage.

Asking banks to police mortgage brokers is the same proposition that the SEC has with Wall Street’s investment banks (and we all know how well that turned out).

We’re going to keep an eye on this to see how things develop for one important reason:

Banks are not resisting the extra responsibility!

About the Author: Michael A. Corley is a licensed Real Estate Broker and Executive Vice President at Corley Realty Group.  Born and raised in Brooklyn, he resides in Crown Heights with his wife and children.