Smaller banks and community lending institutions will have far greater access to FHA loans if several major proposed changes take root, according to housing experts.
In a move aimed at minimizing risk, the U.S. Department of Housing and Urban Development announced plans to end its longstanding requirement that brokers receive FHA approval before arranging home loans. Now, if the proposed change becomes regulation, it would be up to the major lenders to monitor those so-called “mini-Eagle” brokers.
This regulatory change could open the floodgates for scores of new brokers to start arranging FHA loans. Smaller community banks, credit unions and other local resources would likely have more access to the FHA than ever before.
“It will expand the reach of FHA to a broader segment of the market, while putting the risk on the companies with the deep pockets,” Brian Chappelle, a partner at Potomac Partners, a Washington consulting firm, recently told American Banker.
The move would also help the FHA shift risk to those larger companies. Under the proposed change, the FHA-approved mortgagee would assume responsibility and liability for the loan.
HUD has also proposed a regulatory change to raise the minimum net worth for FHA lenders to $1 million from $250,000. The agency hasn’t increased the level since 1993. The new level would take effect within one year of enactment.
Agency officials claim the increase would help ensure lenders can cover potential losses and minimize risk to the FHA insurance fund. The FHA has raised concerns recently after officials announced its capital reserve fund was poised to dip below mandatory levels.
FHA loans continue to gobble up market share among American homebuyers. These relatively low-cost loans now account for about a quarter of all residential mortgages – up from just 3 percent three years ago.
"By keeping affordable loans flowing, particularly to the growing ranks of first-time homebuyers, the FHA has been critical to our nation's economic and housing market recovery," U.S. Department of Housing and Urban Development Secretary Shaun Donovan said in a news release. "As we begin to move from recession to recovery, these changes will not only ensure FHA's financial strength but they will also help to further strengthen our nation's economy."