A national home bureau on Tuesday said it’d allow it to be easier for banks to prevent exorbitant fees for some mistakes perpetrated during the mortgage process, in a play to start financing to less-creditworthy borrowers.
The Federal Housing Administration on Tuesday unveiled a brand new certification that lenders must attest to when making an FHA-backed mortgage.
The new provision restricts banks’ obligations for some loan mistakes. That could mean mortgages become more easy to get for borrowers who qualify for government approval but have high debt or low credit ratings.
The FHA doesn’t make loans. It sells. The FHA backs loans to home buyers or mortgage refinancers with a down payment of as little as 3.5% and a credit score of as low as 580 on a scale of 300 to 850.
Ed Golding, who heads the FHA, said the bureau expects the changes will make more loans available to borrowers with credit ratings below 680, a group that in recent years has fought to find lenders willing to make loans.
The certification is, in effect, a guarantee to the authorities. Under the present variant of the certification, lenders guarantee that loan files include no errors, a standard that some bank officials have said is not easy to uphold in loan files that are complex. When difficulties have been found by government officials, they’ve used the certification to pursue lenders for triple damages under the False Claims Act, a Civil War-era law designed to penalize sellers for defrauding the authorities.
The new certificate tries to restrict those punishments to mistakes that result in the FHA backing have qualified. For instance, under the old certification, lenders considered that they could be opened by misstating a borrower’s income by one dollar up to large obligations.
The new provision, which takes effect in August, WOn’t penalize lenders for such errors so long as they weren’t deliberate and the borrower qualified.
“They’ve tried to narrow lender threat to the types of errors lenders can and should restrain,” said Jim Parrott, a senior fellow at the Urban Institute who also consults for some lenders. The change “means that more of the low-wealth borrowers FHA is meant to help will locate lenders to make them an FHA loan.”
& Co. last year increased its minimum credit score on FHA loans to 640 from 600. Quicken Loans Inc., which is now fighting an FHA-associated litigation from the Justice Department, has threatened to pull back sharply from the plan. The firms didn’t promptly react to requests for opinion.
Bank of America last month unrolled a brand new mortgage product that lets some borrowers get an affordable mortgage with a down payment of as little as 3%, in direct rivalry with FHA-backed loans.
Justice Department officials in a blog post on Tuesday said banks were pursued by the section for major mistakes and would keep doing so.
No lender will confront False Claims Act enforcement based on an immaterial condition or an unknowing error, the place that was ” said. “At exactly the same time, the section is not going to hesitate to bring an action where a lender…submits claims and false statements.”
The FHA has taken several stabs at repair the certificate to allay lender worries. In September, a draft of the provision was met with a speedy negative reaction from lenders, including Quicken Loans and Wells Fargo, who said the provision didn’t restrict obligations.
This time, some in the sector were more positive.
“In our first review, we understand the FHA has made clear progress over the preceding variant,” said David Stevens, chief executive of the Mortgage Bankers Association and a former FHA commissioner. Mr. Stevens said that the commerce group’s members still need to interpret the provision, but that he believes the changes could “stop the bleeding” of lenders pulling back from the FHA plan.
With the new provision in position, lenders are running low on reasons for continuing to constrict mortgage availability, said Sarah Edelman, manager of housing policy for the left leaning Center for American Progress.
“We’ve sort of been in a scenario where every couple of months, there’s a new reason lenders aren’t giving,” Ms. Edelman said. “This will be an essential second to see how they react.”