The Federal Housing Administration (FHA) is providing mortgage lenders with greater clarity over how it will go about identifying and categorizing loan defects by way of its Single Family Loan Quality Assessment Methodology or ‘Defect Taxonomy,’ which was posted to its website this week.
Part of the FHA's ‘Blueprint for Access,’ the Defect Taxonomy will not only help lenders identify defects, but it will also help them identify the sources and causes of those defects. What's more, it will help them assess the severity of each defect.
By giving lenders better clarity and certainty with regard to regulations and policies, the FHA hopes that lenders will have more confidence to free up credit for underserved borrowers. The new taxonomy will complement the updated certification language the FHA has released and the FHA's new handbook, the first section of which becomes effective in September, creating a stronger quality assurance program, the FHA says in a press release.
‘This new guidance gives lenders greater insight into how the FHA will capture defects and their relative severities,’ explains Edward Golding, the FHA's principal deputy assistant secretary for housing. ‘By enhancing our approach, lenders will have more confidence in how they interact with the FHA, and we anticipate they will be more willing to lend to future homeowners who are ready to own.’
Julian Castro, director of the FHA, first discussed the Loan Defect Taxonomy during the Mortgage Bankers Association's (MBA) Annual Conference and Expo in October last year. He explained that the new taxonomy would take the 99 different codes the FHA uses to describe loan defects and boils them down to nine distinct categories. He said this ‘new way of looking at loan defects’ is expected to become ‘a critical tool for our partners,’ as it ‘will allow FHA to monitor trends in deficiencies and determine if policies can be enhanced to help lenders avoid deficiencies.’
The nine new categories will be supported by codes that will identify the source and cause of the defect – and offer some new insight into the significance of a given deficiency within each category, the FHA says in its release.
The nine defect categories under the new taxonomy are as follows:
- Borrower income (BI);
- Borrower credit/liabilities (BC);
- Loan-to-value and max mortgage amount (LM);
- Borrower assets (BA);
- Property eligibility (PE);
- Property appraisal (PA);
- Borrower eligibility and qualification (BE);
- Mortgage eligibility (ME); and
- Lender operations (LO).
Although the FHA is yet to set a date for when the Defect Taxonomy will go into effect, it is posting the information on its website early so that lenders have insight into the FHA's policy and, thus, can adjust their internal quality control processes ahead of time.
In response to the news, David H. Stevens, president and CEO of the Mortgage Bankers Association, says, ‘The FHA loan quality assurance framework standards is a step in the right direction toward helping HUD focus on the most egregious risk in its portfolio and providing better clarity to lenders on which defects pose the greatest risk.
‘There is more work that surely needs to be done, and MBA believes that the industry's input on issues such as this must be an important part of the decision-making process to expand homeownership opportunity,’ Stevens adds. ‘The MBA looks forward to continuing to work with FHA and all stakeholders on this and other issues that can help restore a vibrant real estate market.’