[Federal Register Volume 64, Number 94 (Monday, May 17, 1999)]
[Notices]
[Pages 26769-26771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12282]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4513-N-01]
Mortgagee Approval for Single Family Programs; Clarification
Procedures for Terminating Origination Approval Agreements and
Placement in Credit Watch Status
AGENCY: Office of the Assistant Secretary for Housing, HUD.
ACTION: Notice.
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SUMMARY: It is the longstanding policy of HUD's Federal Housing
Administration (FHA) to issue periodically mortgagee letters to FHA-
approved lenders to apprise the lenders of upcoming changes in FHA
programs, new processing requirements, or clarification of existing
procedures, among other things. The FHA has issued a mortgagee letter
to advise FHA lenders that HUD/FHA will be using its regulatory
authority to terminate lenders' authorization to originate single
family loans or, alternatively, place lenders on Credit Watch status
(an evaluation period) in geographic areas where the lender has a high
rate of early defaults and claims. The FHA is publishing the contents
of this mortgagee letter in the Federal Register for the benefit of the
public.
FOR FURTHER INFORMATION CONTACT: For further information contact: the
Quality Assurance Division, Office of Housing, Department of Housing
and Urban Development, 451 Seventh St, SW, Room B-133, Washington, DC,
20410; telephone (202) 708-2830 (this is not a toll-free number).
Persons with hearing or speech impairments may access that number via
TTY by calling the Federal Information Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION: The Department has the authority to address
deficiencies in the performance of lenders' loans as provided in the
HUD mortgagee approval regulations at 24 CFR 202.3. The latest
revisions to these regulations were published as an interim rule on
December 10, 1997 at 62 FR 65180 (which contains the text of the
amendments) and were published as a final rule on August 17, 1998 (63
FR 44360), which was effective September 17, 1998. In the near future,
HUD/FHA will systematically review mortgagees' early default and claim
rates, that is, defaults (loans 90 or more days delinquent) and claims
on mortgagees' loans during the initial 24 months from endorsement. HUD
may place mortgagees with excessive default and claim rates on Credit
Watch status or, in cases of more severe performance deficiencies,
terminate mortgagees' loan origination approval authority.
Termination of Origination Approval Agreement
Approval of a mortgagee by HUD/FHA to participate in FHA mortgage
insurance programs includes an Origination Approval Agreement
(Agreement) between HUD and the mortgagee. Under the Agreement, the
mortgagee is authorized to originate single family mortgage loans and
submit them to FHA for insurance endorsement. The Agreement may be
terminated on the basis of poor performance of FHA-insured mortgage
loans originated by the mortgagee. The Termination of a mortgagee's
Agreement is separate and apart from any action taken by HUD's
Mortgagee Review Board under HUD's regulations at 24 CFR part 25.
Frequency and Scope of Reviews
Every three months, HUD will review the rate of defaults and claims
on all FHA-insured single family mortgages. The review will analyze the
performance of every participating mortgagee branch in each geographic
area served by a HUD field office. The review will be limited to loans
endorsed for insurance within the preceding 24 months.
Unacceptable Results
HUD's regulations permit HUD to terminate the Agreement with any
mortgagee having a default and claim rate for loans endorsed within the
preceding 24 months that exceeds 200 percent of the default and claim
rate within the geographic area served by a HUD field office, and also
exceeds the national default and claim rate. Mortgagees whose default
and claim rates exceed both the national rate and 200% of the field
office rate are at risk and may have their Agreements terminated.
Initially, HUD will focus its attention on those mortgagees showing
particularly high default and claim rates. For the first review period,
HUD will consider terminating the Agreement of any mortgagee whose
default and claim rate exceeds both the national rate and 300% of the
field office rate. HUD will notify the mortgagee, via certified mail,
before terminating its Agreement.
In any one of the subsequent review periods, HUD may set the field
office portion of the termination threshold at a rate other than 300%
of the field office rate, but not lower than 200% of such rate. HUD
will give notice of the threshold for each review period by Mortgagee
Letter.
Mitigating Factors Evaluated Initially
Prior to sending a Termination notice, HUD/FHA will analyze
mortgagees' portfolios of loans to determine if their poor performance
is due to where they originated loans and the types of loans they
originated. HUD/FHA will analyze loan types in terms of FHA's three
Insurance Funds and place in terms of underserved versus served census
tracts. For each of these five analyses, the mortgagee's loan
performance will be compared to the Field Office average for similar
loans. For example, in the first review period, if the mortgagee's rate
of defaults and claims on loans in underserved census tracts does not
exceed 300% of the field office's rate of defaults and claims in
underserved census tracts, the mortgagee's performance is below the
Termination threshold in underserved areas. Mortgagees with a
performance below the Termination threshold in each of these five
assessments will not receive a Termination Notice; however, they may
receive a Credit Watch notice (see Credit Watch description below).
Appeal Process
HUD regulations at 24 CFR 202.3(c)2)(ii)(C) permit a mortgagee to
request an informal conference with the Deputy Assistant Secretary
(DAS) for Single Family Housing, or his or her designee prior to the
termination of its Origination Approval Agreement. A mortgagee desiring
an informal conference must submit a written request to the Docket
Clerk, Departmental Enforcement Center, Legal Division, Room B-133/
VALA, U.S. Department of Housing and Urban
[[Page 26770]]
Development, 451 7th Street, SW, Washington, DC 20410 within 30
calendar days of the date of receipt of the Termination notice.
An informal conference is an oral and/or written presentation, by
the mortgagee or its representative, of information and argument in
opposition to the termination. Whether the presentation is written,
oral, or both is at the option of the mortgagee. A written submission
may accompany the request for an informal conference or be sent
separately; however it must be sent to the Docket Clerk within 30
calendar days from the date of receipt of the Termination notice.
Written submissions should not exceed 15 pages. Oral presentations may
be held in person in Washington, DC or telephonically, and will be held
as quickly as possible but generally no later than 30 days from the
date of the request. All presentations, whether written or oral, must
specifically address relevant reasons and factors that were beyond the
mortgagee's control that contributed to its excessive early default and
claim rates or any other facts and circumstances which would explain
the poor performance of the mortgagee's loans. After consideration of
the material presented, the DAS or the designee will issue a decision
in writing within approximately 20 days of the informal conference.
HUD/FHA may determine that the Termination should be sustained,
withdrawn or replaced by putting the mortgagee on Credit Watch status.
If sustained, the Termination will not take effect until a final notice
of determination is issued.
If a mortgagee does not request an informal conference within 30
days of receiving the Termination notice, the right to confer (by oral
or written presentation) will be deemed to have been waived by the
mortgagee and its Agreement will be terminated 60 days from the date of
the Termination notice without further notification from HUD.
Effect
Termination of the Agreement precludes that office of the mortgagee
from originating FHA-insured single family mortgages within the area of
the HUD field office(s) listed in the notice. Mortgagees authorized to
purchase, hold, or service FHA insured mortgages may continue to do so.
Loans that closed or were approved before the Termination became
effective may be submitted for insurance endorsement. Approved loans
are those already underwritten and approved by a Direct Endorsement
(DE) underwriter employed by an unconditionally approved DE lender and
cases covered by a firm commitment issued by HUD. Cases at earlier
stages of processing cannot be submitted for insurance by the
terminated branch; however, they may be transferred for completion of
processing and underwriting to another mortgagee or branch authorized
to originate FHA insured mortgages in that area.
A terminated mortgagee may request to have its authority to
originate FHA loans reinstated no earlier than 6 months after the
effective date of the Termination. The request, addressed to the
Director, Lender Activities and Program Compliance, should describe any
actions taken (e.g., changes in operations and/or personnel) to
eliminate the cause(s) of the poor loan performance that led to the
Termination.
Scope
If more than one of a mortgagee's branch offices will be terminated
in a field office, HUD will assess the mortgagee's performance in
aggregate (all branch offices) in that area. If the institution's
default and claim rate in the area exceeds the national rate and
exceeds the field office portion of the termination threshold (for the
first quarter, 300% of the field office default and claim rate), HUD
may terminate all of the mortgagee's branch offices in that area.
Publishing Actions
The Department will publish a list of mortgagees which have had
their Origination Approval Agreements terminated in the Federal
Register and on HUD's Web Site, together with a general explanation of
the cause and effect of terminating the Agreements.
Credit Watch Status
Unlike Termination of an Origination Approval Agreement, Credit
Watch does not affect a mortgagee's ability to originate single family
mortgages for submission for FHA mortgage insurance. It is a warning
that a mortgagee's Agreement may be terminated in the future if the
mortgagee's default and claim rate does not improve.
Frequency and Scope of Reviews
Every three months, HUD will review the rate of defaults and claims
on all FHA-insured single family mortgages. The review will analyze the
performance of every participating mortgagee branch in each geographic
area served by a HUD field office. The review will be limited to loans
endorsed for insurance within the preceding 24 months.
Unacceptable Results
HUD is authorized under its regulations to place a mortgagee on
Credit Watch status when the mortgagee's default and claim rate exceeds
150 percent of the field office default and claim rate.
Initially, HUD will focus its attention on those mortgagees showing
particularly high default and claim rates (but not high enough to
prompt termination). In the initial review period, HUD will consider
placing on Credit Watch any mortgagee whose default and claim rate
exceeds 200% of the field office rate.
In any one of the subsequent review periods, HUD may set the
threshold for Credit Watch at a rate other than 200%, but not lower
than 150%, of the field office rate. HUD will give notice of the
threshold for each review period by Mortgagee Letter. For each review
period, mortgagees whose default and claim rates exceed 150% but fall
below the Credit Watch threshold for that round will be notified of
their performance rating but will not initially be placed on Credit
Watch. However, these lenders should promptly take action to eliminate
the cause of their high default and claim rates.
Mitigating Factors Evaluated Initially
Prior to placing a mortgagee on Credit Watch status, HUD/FHA will
analyze mortgagees' portfolios of loans to determine if their poor
performance is due to where they originated loans and the types of
loans they originated. HUD/FHA will analyze loan types in terms of
FHA's three Insurance Funds and place in terms of underserved versus
served census tracts. For each of these five analyses, the mortgagee's
loan performance will be compared to the Field Office average for
similar loans. For example, in the first review period, if the
mortgagee's rate of defaults and claims in underserved census tracts
does not exceed 200% of the field office's rate of defaults and claims
in underserved census tracts, the mortgagee's performance is acceptable
in underserved areas. Mortgagees with acceptable performance in each of
these five assessments will not be placed on Credit Watch Status. In
addition, having a default and claim rate at or below the national
default and claim rate will be considered a mitigating factor.
Appeals
Because Credit Watch Status does not preclude a mortgagee from
originating mortgages and submitting them for insurance and there is no
public announcement of lenders on Credit
[[Page 26771]]
Watch status, mortgagees are discouraged from appealing placement on
Credit Watch. However, written appeals will be considered.
Delayed Effective Date
A mortgagee will be notified that it is being placed on Credit
Watch Status at least 30 days before the effective date. Mortgagees are
strongly encouraged to use this time to investigate and remedy the
cause(s) of the high rates of early defaults and claims, so that their
performance will have improved on the portfolio that HUD will assess.
``Watched'' Portfolio
Following placement on Credit Watch status, HUD will review the
portfolio of the mortgagee's loans that are insured by HUD/FHA during
the six months beginning the day Credit Watch Status became effective
to check for signs of improvement. The performance of this portfolio
will be compared against the field office default and claim rates on
mortgage loans insured during the same six month period.
Watch Assessment
If the default and claim rate on the ``watched'' portfolio (as
described above) is acceptable in comparison to the field office
default and claim rates one year after the six month tracking period
ends (i.e., 18 months after the effective date when HUD placed the
mortgagee on Credit Watch Status), the mortgagee will be removed from
Credit Watch status. An acceptable default and claim rate is one that
does not exceed the Credit Watch threshold when compared to the field
office default and claim rate. A mortgagee with a rate above that
threshold may be removed from Credit Watch, depending on mitigating
factors and whether the default and claim rate is rising or falling.
Termination Analysis Continues
Mortgagees must be aware that if they are placed on Credit Watch
Status, in addition to performing an assessment of the mortgagee's
``watched'' portfolio, HUD/FHA will continue to assess all mortgage
loans insured over the 24 months preceding the analysis. If the
mortgagee's 24 month default and claim rate exceeds the termination
threshold, the mortgagee may receive a notice that HUD proposes to
terminate its Origination Approval Agreement. This is why mortgagees
should promptly investigate and remedy causes of high default and claim
rates as stated above.
Publishing Actions
Mortgagees placed on Credit Watch Status will not be listed in
either the Federal Register or on HUD's Web Site.
Considerations
Volume
HUD/FHA is aware that defaults may stem from changes in the
mortgagors' circumstances, rather than imprudent underwriting. To
lessen the effect of a small number of loans, HUD/FHA will establish a
minimum number of defaults and claims. The Department will perform
Credit Watch and Termination analyses only for mortgagees that have
defaults and claims above the de minimis amount but with the following
caveat. If HUD/FHA finds a mortgagee that originates few loans but
continually has a default and claim rate that exceeds the field office
and national default and claim rates, the Department reserves the right
to take appropriate action within the Credit Watch/Termination
regulations.
Underserved Areas
For both Credit Watch and Termination actions, HUD/FHA is defining
underserved census tracts as those identified by OMB as meeting the
definition found at 24 CFR 81.2. Underserved census tracts are: (1)
tracts in metropolitan areas (a) having a median income of no more than
90% of the MSA as a whole or (b) having a median income of no more than
120% and minorities comprise at least 30% of the tract's population;
(2) all tracts in any non-metropolitan county which (a) have a median
income of no more than 95% of the non-metropolitan part of the State or
the Nation, whichever is greater, or (b) have a median income of no
more than 120% and minorities comprise at least 30% of the county's
population.
Riskier Programs
Mortgages insured under the Mutual Mortgage Insurance Fund (e.g.
203b) should be less risky than loans insured under the General
Insurance Fund (e.g. 203k) or the Special Risk Insurance Fund (e.g.
223e). After determining that a mortgagee has an excessive rate of
early defaults and claims in a field office, its performance by fund
will be analyzed as described above under mitigating factors.
New to FHA
Where an institution has been approved for less than 24 months, its
branches will be placed on Credit Watch in lieu of being terminated if
their performance exceeds the termination threshold but with the
following caveat. If HUD/FHA finds a new mortgagee continually has a
default and claim rate that exceeds the field office and national
default and claim rates, the Department reserves the right to take
appropriate action within the Credit Watch/Termination regulations.
Conclusion
The procedures outlined in this notice (and the Mortgagee Letter
issued to FHA mortgagees) should have minimal impact for mortgagees
that have in place and are effectively using an adequate quality
control plan for loan origination. These procedures are expected to
impact mortgagees that have an inadequate quality control plan or are
inadequately executing their plan. The result will benefit the public
and most FHA mortgagees, as well as the Department.
Dated: May 10, 1999.
William C. Apgar,
Assistant Secretary for Housing, Federal Housing Commissioner.
[FR Doc. 99-12282 Filed 5-14-99; 8:45 am]
BILLING CODE 4210-27-P
