Residential: HUD makes changes aimed at attracting banks back to FHA program

“We need depository lenders to come back,” Department of Housing and Urban Development (HUD) Secretary Ben Carson said in an interview on CNBC last week, where he announced new changes to Federal Housing Administration (FHA) programs aimed at restoring the balance between bank and nonbank participation.

“Following the financial crisis, we saw HUD clamp down with billions of dollars in enforcement actions, in many cases related to nonmaterial violations of the False Claims Act,” said Tim Rood, SitusAMC Managing Director. “These actions led to the retreat of bank lenders. Rightsizing penalties and revising policies, like HUD has introduced, should begin the process of inviting these players back to FHA.”

In his recent interview, Carson said HUD had coordinated with the Department of Justice (DOJ) to review False Claim Act enforcement policies and their effects. In response, Carson said FHA has revised annual eligibility certification requirements, loan limit certification requirements and defect taxonomy. Carson said he hopes these changes will “even out” the balance of banks and nonbanks participating in the FHA program.

The changes to the DOJ and HUD’s approach to False Claims Act enforcement are outlined in a new Memorandum of Understanding, Interagency Coordination of Civil Actions under the False Claims Act Against Participants in FHA Single Family Mortgage Insurance Programs.

Prior to the financial crisis, bank lenders originated roughly half of FHA-insured loans. That share is down to less than 15% today. Previous administrations “were so vigorous in their pursuit [of enforcement] that they basically drove depository institutions away,” said Carson.

“The lenders who continued offering FHA mortgages often made the business case for raising rates to build reserves for future enforcement actions — raising costs for borrowers,” Rood told DS News.

At the same time, nonbank lenders, who originated just 20% of FHA-insured loans in 2007, have continued to absorb a growing FHA market share. “Nondepositories have helped to fill in the gap, but we want to expand the credit pool” for low- and moderate-income homebuyers, said Carson.

“We’re happy to see HUD addressing some of the frustrations that have driven certain lenders away over the past decade from FHA programs, which play a central role in helping millions of Americans achieve homeownership,” said Rood.

Carson said many banks have already reached out to HUD about training for recent changes, including these revisions as well as FHA’s new condo rule. “These are the things that are going to make a difference for low- and moderate-income households,” he said.

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