It will more expensive for lenders to do business with the Federal Housing Administration (FHA) if a new method for determining lenders’ liability for poorly written loans that default is adopted. Currently, when defects are discovered lenders have to eat the losses on those loans. Under the new proposal, FHA would conduct a sampling of loans, determine the percent that have underwriting errors, extrapolate that number to the portfolio and the lender than pays an “estimated total risk” to FHA. Phillip Schulman of K&L Gates law firm, and a former lawyer with HUD, says, “If this goes through, it means it will be a lot more expensive to be an FHA lender. If a lender runs the risk that every time he makes a mistake it will be multiplied against his entire portfolio, he has to be very cautious.” In June 2013, of 6,251 loans FHA reviewed from the first quarter, only 19 percent had no mistakes, while 44 percent were unacceptable, and 37 percent were deficient, according to nationalmortgagenews. In addition, if the percent of loans with defects crosses a particular line, MHProNews has learned it would automatically trigger more scrutiny.
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