January 23, 2012
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On January 20, HUD announced and released a new final rule strengthening its lender indemnification process and raising its lender performance standards. 
 
According to the new rule, HUD may require indemnification of loans insured by Lender Insurance lenders for “serious and material” violations of FHA origination requirements and for fraud and misrepresentation such that the mortgage never should have been endorsed by the lender. 

In addition, Lender Insurance mortgagees must demonstrate two-year seriously delinquent and claim rates at or below 150 percent of the aggregate rate for the states in which the lender does business.  The rule states that FHA will also monitor lender performance on an ongoing basis to ensure that participating lenders continue to meet the program’s eligibility standards. 

In a separate Federal Register notice to be published soon, FHA will propose to reduce the maximum allowable seller concession from its current level to one more in line with industry norms.  HUD says the current level exposes FHA to excess risk by creating incentives to inflate appraised value.  The revised proposal reflects public comments on an earlier proposal published in July 2010.  HUD will accept public comment on the revised proposal.

Acting Federal Housing Commissioner Carol Galante said, “[T]aken together, the changes announced today will protect FHA’s insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD’s underwriting expectations.  FHA must continue to strike a balance between managing risks to its insurance funds and ensuring that FHA products are offered as widely as possible to qualified borrowers.  We hope that the added clarity and certainty provided through these rules will enable lenders to extend financing opportunities to larger numbers of American families as the nation’s housing market and economy continue to recover.”

HUD expects the final rule to be published soon in the Federal Register.