[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