The Senate Banking Committee approved a FHA reform bill (S. 1374) last July that expands the agencys indemnification powers to seek buybacks or recover loan losses from all its direct endorsement lenders. Currently, FHAs indemnification authority is limited to its largest originators that participate in the lender insurance program.
However, the expanded indemnification powers come with certain limitations that are outlined in a legislative report the committee released Dec. 19.
To qualify for indemnification, the mortgage must have a material defect that would have prevented the loan from being insured or have involved fraud or misrepresentation. Except in cases of fraud or misrepresentation, the loan must have been delinquent within 36 months and resulted in a default, the committee report says.
Mortgage consultant Brian Chappelle noted that significant lender errors usually surface in the first 12 months.
While the industry would like a shorter window than 36 months, he says, at least it puts a time limit in place.
The FHA reform bill co-sponsored by Senate Banking Committee chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, also authorizes the agency to order transfers of mortgage servicing rights for the first time.
This section permits the HUD secretary to issue rules requiring an underperforming servicer to contract with a specialty subservicer for a single mortgage or any pool of mortgages, the committee report says.
FHA must give the servicer a reasonable amount of time to fix the problem before the MSRs are transferred to a specialty servicer.
The rules must also ensure the authority provided in this section only applies to activities that may materially and adversely affect the secretarys ability to recover in the future and be limited to mortgages that share similar underwriting, borrower and performance characteristics, the committee report says.
The original draft of the bill gave FHA broader discretion to transfer servicing. The new servicing language is actually an improvement from the original language, Chappelle told NMN. The industry would have been reluctant to service FHA loans if FHA could take the servicing at their own discretion. Chappelle is a co-founder of Potomac Partners in Washington.
There is speculation that Congress might pass the Senate FHA reform bill next year if it becomes clear the House and Senate will not be able to agree on a larger housing finance reform bill that deals with Fannie Mae and Freddie Mac.