FHA Screens Brokers to Help Contain Government Foreclosures

by Peter Vernon on Foreclosure Help

In an effort to reduce government foreclosures, the Federal Housing Administration has tightened its screening process for mortgage brokers who are allowed to originate FHA loans.

Housing officials contend that in the past, many mortgage brokers enticed borrowers to take out risky mortgage loans and higher loan amounts to increase their sales commissions. Because a number of these loans were insured by FHA, the number of government foreclosures significantly increased when the borrowers defaulted.

Since 2007, the HUD, which supervises FHA, has taken over 110,000 units in government foreclosures. As of May this year, over 50,000 government foreclosures are being held by federal agencies that have housing programs.

Mortgage brokers who want to work with FHA are also now required to get approval from the HUD when they originate FHA loans. In the past, mortgage brokers could refer prospective buyers anytime to lenders and then charge the borrowers for fees.

In addition, brokers who had been convicted of originating fraudulent mortgage loans can no longer take part in any FHA loan program.

However, William Apgar, adviser to the mortgage finance secretary at HUD, warned that there are probably unscrupulous brokers who have gone through the FHA screening processes successfully. He said that in the past, many companies and not their employees were penalized for fraudulent lending.

Apgar said that there are already 13,000 mortgage brokers with FHA licenses.

FHA loans are preferred by first-time homebuyers because these loans are designed for borrowers with lower credit scores and less money to pay down payments. FHA also charges lower interest rates. During the first week of June, the rate for fixed-rate 30-year loans was 5.5 percent.

In the past, many borrowers ignored FHA loans because they could get subprime loans more easily from other lenders without down payments and without FHA insurance premiums. In retrospect, this fact worked in FHA favor because if more borrowers took out FHA loans in the past, there could have been more government foreclosures.

Now that risky adjustable mortgage loans are no longer offered by most banks, more subprime borrowers are applying for FHA loans.

Since May last year, approximately 20 percent of all mortgages originated have been FHA loans, compared to only around two percent in 2006, based on HUD data.

Even so, borrowers are warned by Richard Tracy, a top official at the Connecticut Society of Mortgage Brokers, to make sure their lenders or brokers are really accredited by FHA. They should visit their state banking agencies or the official HUD web site to check if their lenders or brokers are licensed to make FHA loans. Government foreclosures are lessened if FHA borrowers and lenders follow mortgage regulations.