Difficulties in getting a mortgage for those with low credit scores and little money to put towards a down payment prevent many Americans from buying a home.
These difficulties have been compounded by the lack of clarity with regards to the consequences of errors made when issuing federally insured loans.
The Federal Housing Administration (FHA) touched off a controversy last September by issuing a new certification that appeared to hold banks accountable for minor factual errors in the FHA-insured mortgages they grant.
To quiet the firestorm, FHA Chief Ed Golding released a letter this week announcing a revision to the "final loan-level certification" that eases the burden on banks to get everything perfect.
But the FHA, an agency within the Department of Housing and Urban Development that insures 3.5-percent-down-payment mortgages offered by participating banks to applicants with credit scores as low as 580, announced a revised policy this week.
The revision should encourage banks to make more FHA-backed mortgages, thereby stimulating home ownership for applicants who have poor credit ratings and/or can afford only small down payments.
According to Golding, these changes clearly define the kind of loan-level mistakes that the FHA has no intention of pursuing in an enforcement action, while also providing clarity to what lenders are certifying to. Golding says that the FHA's goal is to insure that lenders make every effort to obtain accurate information and validate it, while recognizing that errors do occur from time to time.
The September version of the certification appeared to hold banks liable for significant penalties due to mortgage files with minor defects. That version was a pledge to the government that loan files were free of errors, making banks vulnerable to the False Claims Act that assesses triple damages.
The Act was passed during the Civil War to guard against fraud perpetrated by government vendors. In theory, a bank could be fined if an applicant's income was misstated by as little as $1.
Naturally, the September version had a chilling effect on FHA-backed mortgage originations.
For example, Bank of America and J.P. Morgan Chase sharply curtailed their participation in the FHA mortgage program after they were slapped with steep penalties.
Another lender, Wells Fargo, increased the minimum credit score it required for FHA-insured mortgages from 600 to 640. Quicken Loans is also threatening to pull back from the FHA program.
To calm these troubled waters, the FHA's latest revision, which will go into effect August 1, 2016, will hold mortgage lenders liable only for "mistakes that would have altered the decision to approve the loan," according to Mr. Golding's letter.
Liability-free mistakes must be unintentional and not make the difference as to whether or not an applicant is eligible for the mortgage.
The effect is to narrow the risks faced by lenders, holding them liable only for the mistakes they can control. Borrowers with subprime credit scores (below 680) or low net wealth should therefore have more luck finding lenders willing to make FHA-backed mortgages.
HUD Secretary Julian Castro commented to a conference of the National Association of Hispanic Real Estate Professionals that, "Now our partners know exactly what we expect when they do business with us. And we hope to see more responsible Americans with average credit scores get that email message saying 'Congratulations, your mortgage has been approved'."
By no coincidence, the Justice Department posted a blog to coincide with Mr. Golding's letter and Mr. Castro's comments, stating that lenders will not face False Claims Act enforcement based on unknowing mistakes or immaterial requirements.
But it followed this up by stating that the Department will not hesitate to take action when lenders submit false claims and statements. According to the Department, those falsehoods can arise from:
- Not properly verifying a borrower's credit, assets or employment as required by the FHA
- Significantly overstating a borrower's assets, income or readiness to pay back the mortgage
- Significantly understating a borrower's existing debt or capability of repaying the loan
- Not making sure that the mortgaged property affords sufficient collateral for the loan
To differentiate trivial mistakes from prosecutable errors, the Justice Department offered up a few examples:
- A 2014 settlement with SunTrust Bank of $418 million over FHA-insured loans that didn't meet FHA requirements, and failure to self-report the defective mortgages it knew about. The bank owned up to the fact that its mortgage quality control procedures were sloppy.
- A 2015 settlement with Metlife Home Loan of $123.6 million over ineligible mortgages submitted to the FHA loan guarantee program, despite the fact the Metlife knew the loans to be defective.
- A 2015 settlement with First Tennessee Bank of $212.5 million for ignoring its own quality control findings and submitting ineligible mortgages to the FHA without even once reporting material deficiencies.
Although the Justice Department will continue to interpret the significance of errors, the Mortgage Bankers Association (MBA) took a fairly constructive approach to the new certification language, saying that it appreciated FHA's efforts to increase certainty in the underwriting and processing of FHA-insured mortgages.
The MBA also said that, on first review, the language used appeared to be an improvement over previous loan-level and lender certifications.
In addition to the final loan-level certification, lending-company executives must also provide "annual lender certifications" that they are not involved in serious crimes, fraud or civil violations that would compromise their ability to meet their FHA-related reporting responsibilities.
Lenders have fewer excuses for not offering FHA mortgages now that the certification language has been revised.
According to Housing Policy Director Sarah Edelman of the Center for American Progress, "We've sort of been in a situation where every few months, there's a new reason why lenders aren't lending." She stated that this is going to be an important moment to see how lenders respond.
For those of you looking for an alternative to an FHA-backed mortgage, refer to GET.com's article describing low-down-payment mortgages from Bank of America that require only 3 percent up front.
You can also check out low-down-payment mortgagesoffered by the Veteran's Administration, the U.S. Department of Agriculture, and the Conventional 97 and HomeReady programs offered by Fannie Mae.