What the heck is HUD thinking?

?: Can anyone explain to me how not requiring brokers/loan correspondents to be approved was a move done by HUD to “strengthen risk management?

Other than the possible cost benefit of being able to layoff a small number of people HUD is exposing the insurance fund to more risk on a massive scale by making this switch.  The end result of loosening the requirements of who can originate is only going to make guidelines tighter, upfront and monthly premiums higher, total origination volume will decrease and the fund will be heavily taxed by having to payout on the higher level of delinquent loans.

Are lenders going to require brokers to have $63k net worth? pay LO’s w-2 for all deals FHA & conventional? submit annual audited financials? have 10% of their files audited by an outside 3rd party QC company?

Talk about a terrible decision.  Notice how this is happening right as HUD raises upfront and monthly premiums.

The only thing this will do is show a huge spike in revenue for the department for 1-2 years. Then Shaun Donovan will be able to put on his resume that he single handedly boosted the revenue by x%, he’ll get promoted to a higher political office for his great work as housing secretary, then when the bad loans start to become problematic from all the brokers who had no vested interest in originating good loans he will be in another department and not care that he left the program in shambles…didn’t we just go through this at Fannie/Freddie???  or am I just having mortgage industry Deja vu?

I can’t believe that after what the mortgage industry just went through anyone at HUD could think that making the process of earning the right to originate HUD insured loans significantly easier could be a good idea…amazing…

Here is another good article on the topic:

http://thenichereport.com/blog/2010/05/the-new-hud-reform-a-quality-control-dilemma/

Here is a newsletter from our QC company, I think she makes some valid points, unfortunately I don’t think HUD is listening…

QCP Systems Newsletter Rosalyn Hardy HUD compliance

HUD’s explanation:

FHA Reform—Strengthening Risk Management through Responsible FHA-Approved Lenders

7 thoughts on “What the heck is HUD thinking?

  1. So with the new finance reform bill that just passed the Senate trying to restrict brokers to 3% total charges (including the bank/wholesale fees and 1.25% of the FHA MIP fee); how is a ‘Small Businesss Broker’ supposed to increase his or her net worth from $500,000 to millions in three years? Who makes this stuff up? Mickey Mouse, The Three Stooges?

  2. Hi Anne,

    Thanks for the comment, I guess the Mortgage Industry experts in Congress are who decide these things. As far as I know 4% is the max total broker compensation (which includes discount points). You touch on a great point though, I really think something needs to be done to put some serious caps on wholesale lenders fees if they are to be included in the caps they are going to put on what brokers can charge. If we do a $100,000 loan and the lender charges $975 in fees (Provident Funding) and we pay our processor $600 for processing the file that is ~ 1.5% already. I checked out your blog, I like it you post some great info.

    P.S.- out of curiosity how did you find my blog? you are the first real commenter on it (excluding comment spammers), I’m so honored I added your blog to my “Blogroll”

  3. also as far as i understand it Mortgage Brokers (Loan Correspondents/Mini Eagles) are still only required to have $63k networth. The $1 mill/$500k net worth requirements are for Mortgage Bankers/Full Eagles.

  4. In my opinion the new rules will “Strengthen HUD Risk Management”. I am saying this although the new Rule is costing me money also. I will have to adjust and change the way I do business because of the new rules. Prior to the new rules, HUD had approximately 8,000 loan correspondents and 3,000 lenders to approve, audit and regulate. Now with the new rules, HUD will only have to approve, audit and regulate approximately 3,000 lenders nationwide.

    Let’s do the Math together and you will see how HUD will be able to “Strengthen its Risk Management”. Now, HUD will be able to audit each lender on an annual basis and return each year to see if the lender has corrected the deficiencies from the previous year.

    1. There are approximately 3,000 lenders

    2. Divide the 3,000 lenders by 12 months = 250 lenders per month

    3. Divide the 250 lenders per month by 4 weeks per month = 62.5 lenders each week

    In order for HUD to audit each lender once a year they will have to audit approximately 63 lenders each week

    There are approximately 150 HUD Auditors Nationwide. It takes approximately 2 HUD auditors to audit one lender per week.

    150 auditors to audit 63 lenders per week?

    It looks like someone at HUD has already done the math and it looks like lenders are now going to be audited at least once every year. And, I wouldn’t be surprised if HUD doesn’t start charging the lenders for their annual audits. Why not, most of the states are charging the lenders for their audits.

    Think about this for a moment. If all of HUD existing rules remain unchanged, except HUD will no longer approve and audit loan correspondents. All of HUD’s 150 auditors can now focus their time and efforts on auditing 63 lenders per week. That gives HUD 2 auditors for each of the 63 lenders each week. Don’t forget HUD still has the regulatory powers over the lenders as always; including the Mortgagee Review Board (MRB) that has the authority to assess monetary fines, impose sanctions and terminate lenders. After a few examples are set by assessing fines, sanctioning and terminating a few lenders, the lenders will get the point and start getting their act together and in return will get their Broker/TPO’s in compliance as well.

    Those of you that are already approved FHA loan correspondents will find that you will have the upper hand over the Non-FHA Approved Brokers. The lenders will be seeking out the FHA Approved loan correspondent/broker/TPO’s because, the FHA loan correspondents have already been vetted, they already know how to originate FHA loans, they have financial statements, they are accustomed to having their files audited by a third party and they are accustomed to being audited by HUD. I think the FHA approved loan correspondents should form their own “Trade Association” and show the lenders that FHA loan correspondents are a CUT ABOVE the Everyday Hum-Drum Garden Variety Type Mortgage Broker and they are the group of brokers that the lenders should want to work with. If this happens, a year or so the “new FHA loan correspondent association” will have created a two class Mortgage Brokers system as it use to be by being HUD approved. But this time it will be the; “SUPER BROKERS” (FHA Approved Loan Correspondents) and Everyday Mortgage Brokers. Mortgage brokers are going to have to step up, shape up or ship out. Remember usually when one door close, if you look hard enough, there usually are several new doors open on a higher level waiting on you to enter.

  5. Thanks for taking the time to comment Ben, you are definitely uniquely positioned to have an opinion on this topic.

    I guess I see what HUD’s gameplan was but I think its flawed logic. You’re asking a private entity whose sole purpose is to generate profit to be screen out potential business partners, the conflict of interest is the heart of the problem. This is HUD we are talking about. The same people who don’t think people who originate loans should be allowed to sell Real Estate because of the potential for the originator to make a decision not in their clients best interest.

    If the broker approval procedures at the lender level are such a competent screening mechanism how did the industry get to where we’ve been since 2007?

    And regarding the trade association for formerly approved HUD Loan Correspondents I don’t think that makes sense because just because a company is a new entrant to the marketplace does not mean they aren’t ethical, diligent business people. I just think that this new system is not going to work for many reasons. Hopefully I’m wrong. I’m not worried about increased competition, I strongly believe that if I do the things I need to do to be successful I will be, no matter what HUD does….

  6. Can you please explain and show me why it is a HUD “conflict of interest” for a person to do a loan and be the realtor. Where is the conflict. There are laws regulating both industries.?

    • Yes I can:

      HUD handbook 4060.1 Section 2-9 (G)

      ….”A mortgagee may employ staff full time or part time (less than the normal 40 hour work week). They may have other employment including self employment. However, such outside employment may not be in mortgage lending, real estate, or a related field. “….

      HUD feels if an agent has too much potential monetary benefit as a result of a transaction closing they are less likely to give clients advice that is in the clients best interest.

      BTW I disagree with this too, I feel that if the agent has a low ethical standard and they are going to give clients bad, false or illegal advice so they can get paid, they are going to do it whether they are getting paid once or twice, but this is HUD’s rule…

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