FHA Streamlines: Indemnifications

Carol Galante, who last year became acting commissioner of the Federal Housing Administration at the Department of Housing and Urban Development (HUD), a few months ago issued an announcement about HUD's decision to revise its Compare Ratio procedures relating to the FHA Streamline.

Commissioner Galante issued the announcement on February 3, 2012, two days after the Obama Administration provided a FACT SHEET: President Obama's Plan to Help Responsible Homeowners and Heal the Housing Market.

The FACT SHEET contained this paragraph:

"...Some borrowers who would be eligible for low-cost refinancing through this program are being denied by lenders reticent to make loans that may compromise their status as FHA-approved lenders. To resolve this issue, the FHA is removing these loans from their 'Compare Ratio', the process by which the performance of these lenders is reviewed. This will open the program up to many more families with FHA-insured loans."

Commissioner Galante's announcement echoed the Administration's view:

"...It has become apparent that some of our lending partners are reluctant to offer this product widely because of concerns about taking on the risk of a loan which they may not have underwritten and the potential adverse impact such a loan may have on their FHA Compare Ratio."

Here is what Commissioner Galante outlined:

• "FHA will make changes to the way in which FHA Streamline Refinance loans are displayed in the Neighborhood Watch Early Warning System (Neighborhood Watch). Streamline Refinances will be removed from the public compare ratio in Neighborhood Watch, but lenders will still be able to view their own traditional compare ratio (with streamlines included)."

• "These changes to the ways in which compare ratios are derived and viewed will require changes to Neighborhood Watch that will take some time. As a result, in the interim period before those changes are complete, FHA will modify its execution of the Credit Watch Termination Initiative to correspond to the changes outlined above."

• "In the coming weeks, FHA will issue additional implementation guidance regarding this policy change and will make this information available at [HUD's website] as soon as it is available." (My emphasis.) 

No need to go to the HUD website.

You won't find much "implementation guidance" there. Since the Obama Administration's and Commissioner Galante's announcements, HUD has issued eight Mortgagee Letters - and none of them deal with this "implementation guidance."

Nevertheless, at least HUD has just clarified how it would treat certain Indemnifications of FHA Streamline Refinances.

HUD has the authority to force indemnification for "serious and material" violations of FHA origination requirements such that the mortgage never should have been endorsed by the mortgagee in the first place, just as FHA would not have insured the mortgage on its own.

So, here follows a brief outline on indemnifying FHA streamline refinances, using the FAQs format. 

IN THIS ARTICLE 

Non credit-qualifying Streamline originated by another Lender

Credit-qualifying Streamline originated by a another Lender

Library

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Non credit-qualifying Streamline
originated by another Lender

Question
Is the mortgagee originating a non credit-qualifying streamline that was originated by another mortgagee liable for serious or material violations of HUD requirements or fraud or misrepresentation on the original loan? 

Answer
No. The lender that originated a loan involving fraud, misrepresentation, or any serious or material violation of HUD requirements is subject to an indemnification obligation and remains subject to such indemnification obligation despite an intervening non credit-qualifying streamline. The lender originating the non credit-qualifying streamlined refinance loan is liable only for its acts in originating the streamline and does not assume liability as a result of any action or omission in the original mortgage. 

Question
If a mortgagee originates a non credit-qualifying streamline that another mortgagee has already indemnified, which mortgagee is liable in the event of a claim on the streamline that occurs during the indemnification period of the original loan? 

Answer
HUD requires indemnification from the mortgagee that indemnified the original loan if a claim occurs during the indemnification period of the original loan. 

NOTE: if the origination of the non credit-qualifying streamline involving serious and material violations of HUD requirements or fraud or misrepresentation results in a claim after the indemnification period on the original loan expired, HUD could request or demand an indemnification on that streamline from the non credit-qualifying streamlined refinance mortgagee. 

Question
If a mortgagee originates a non credit-qualifying streamline that another mortgagee has already indemnified, which mortgagee is liable in the event of a claim on the streamline that occurs after the indemnification period of the original loan expires? 

Answer
Because the indemnification period on the original loan has expired, HUD requires indemnification only from the non credit-qualifying streamlined refinance mortgagee if there were serious and material violations of HUD requirements or fraud or misrepresentation on the non credit-qualifying streamlined refinance transaction. 

Credit-qualifying Streamline
originated by a another Lender

Question
If a mortgagee originates a credit-qualifying streamline that was originated by another mortgagee, which mortgagee is liable in the event of a claim on the streamline refinance? 

Answer
Because the credit-qualifying streamline results in the termination of the previous loan, the underwriting mortgagee on the new credit-qualifying streamline refinance is liable for indemnification on the streamline refinance mortgage.

Library

Federal Housing Administration
Department of Housing and Urban Development

Frequently Asked Questions (FAQs)
on Streamline Refinance Transaction Indemnification)

FHA Notification
June 11, 2012

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* Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.